A recent peer-reviewed study analyzing over 22,000 companies across 62 countries from 2018 to 2021 reveals that firms with robust environmental, social, and governance (ESG) practices experience lower financial volatility during global disruptions. The findings indicate that credible sustainability performance functions as a form of real-world risk mitigation, helping organizations stabilize operations and recover more quickly when faced with turbulent conditions.
The research demonstrates that companies prioritizing stakeholder engagement—through employee welfare, supply chain resilience, community relations, and transparent governance—tend to maintain trust and operational continuity under stress. This effect is particularly pronounced in advanced economies where regulatory scrutiny and investor expectations are high, suggesting that strong disclosure standards enable markets to accurately value responsible business conduct.
Three key insights emerge. First, the resilience advantage linked to sustainability is quantifiable. Organizations with higher ESG ratings exhibited reduced firm-level risk during periods of market instability. This is not merely a reputational benefit; it reflects tangible reductions in uncertainty around cash flows and investor confidence.
Second, the effectiveness of sustainability strategies depends on context. The protective impact was strongest in markets with rigorous reporting requirements and active capital allocation based on non-financial metrics. Regulators aiming to combat greenwashing should prioritize enforcement and clarity in materiality assessments to ensure that only genuine sustainability efforts are rewarded.
Third, the mechanism behind this resilience is operational, not symbolic. Firms investing in long-term relationships with employees, suppliers, and local communities were better equipped to navigate sudden shocks. These relationships serve as buffers, preserving goodwill and minimizing disruptions when external pressures mount.
For policymakers, the implications are clear. Mandatory sustainability disclosures—especially those aligned with global climate reporting standards—should be framed as tools for financial transparency rather than ideological mandates. Reliable, comparable data allows investors and lenders to distinguish authentic transition strategies from superficial claims, directing capital toward more resilient enterprises.
Supervisory bodies must also strengthen penalties for misleading ESG claims. As markets begin to price in sustainability-related risk reductions, the incentive to exaggerate credentials increases. Robust assurance frameworks and clear guidelines on material issues help ensure that only firms with verifiable performance gain access to lower-cost capital.
Public-private partnerships in climate-vulnerable sectors such as energy, agriculture, and infrastructure can further amplify resilience. When governments co-fund adaptation initiatives, they should require measurable sustainability targets and transparent monitoring to ensure public funds support entities capable of delivering systemic risk reduction.
For investors, integrating ESG factors into risk modeling and scenario planning is essential. Priority should be given to companies demonstrating high-quality disclosures, board-level oversight of sustainability risks, and capital expenditures aligned with decarbonization goals. Engagement strategies should emphasize accountability, with clear escalation paths for underperforming firms.
While strong ESG performance does not make companies immune to crises, it enhances their capacity to absorb shocks and rebound faster. In an era defined by compounding risks—from climate change to social unrest—responsible business practices are not a cost but a strategic capability. This insight is critical for regulators shaping disclosure rules, investors allocating capital across volatile regions, and corporate boards evaluating whether sustainability belongs in the C-suite or remains a peripheral function.
— news from Lowy Institute
— News Original —
Sustainability matters when economic shocks hit
When markets lurch, we learn quickly which firms are built to last. Investors often look to balance sheets or levels of debt. But a growing body of evidence points to something else that matters for resilience: credible environmental and social performance. n nIn a recent peer-reviewed study, my co-authors and I analysed data from more than 22,000 companies over four years across 62 countries between 2018 and 2021. We asked a simple question: when global disruptions hit, do firms with stronger sustainability performance experience less financial risk? The answer was yes – and the effect was economically meaningful. In plain terms, ESG strength acted like real-world risk insurance, dampening volatility and supporting recovery when conditions turned rough. n nWhy should policymakers and investors care now? Because the next shocks are unlikely to look identical to the last. Climate-related disruptions, social instability and governance failures are not hypothetical. They are material risk channels that propagate across borders through supply chains, capital markets and insurance costs. For Indo-Pacific economies – deeply exposed to climate extremes and geopolitical uncertainty – the stakes are particularly high. n nThree findings stand out. n nFirst, the resilience premium is measurable. Across global markets, firms with stronger environmental and social performance exhibited lower firm-level risk during turbulent periods. This isn’t a branding story. It’s a market-behaviour story: credible practices build stakeholder trust, reduce uncertainty about cash flows, and limit the amplification of bad news. For large asset owners, this suggests treating ESG signals not as an overlay but as inputs to risk models and stewardship priorities. n nThe evidence shows that firms taking sustainability seriously are not just “doing good”, they are managing risk in a world of compounding uncertainty. n nSecond, context matters. The protective effect was strongest in advanced, shareholder-oriented economies – places where disclosure is scrutinised and capital is quick to reward (or punish) behaviour. That should interest regulators designing sustainability reporting rules and supervisors monitoring greenwashing. Where disclosure quality is high and accountability real, markets appear better at pricing the resilience benefits of responsibility. n nThird, the mechanism is practical, not mystical. Firms that invested in stakeholder relationships – employees, customers, suppliers, communities – seemed to preserve confidence when uncertainty spiked. That aligns with what long-horizon investors already know: human capital, supply-chain continuity and licence-to-operate are risk variables, not soft add-ons. n nWhat does this mean for policy? n nFor one, governments advancing mandatory sustainability disclosure (including climate-related reporting aligned with emerging global standards) can frame reform as risk transparency rather than ideology. Investors and lenders need decision-useful, comparable information to differentiate credible transition and resilience strategies from slogans. High-quality disclosure reduces information asymmetry and supports capital allocation to sturdier firms – exactly what economies want when shocks hit. n nSupervisors should also sharpen anti-greenwashing enforcement. If markets reward ESG strength with lower perceived risk, the incentive to exaggerate credentials grows. Penalties for misrepresentation, together with clear guidance on materiality and assurance, help ensure the “resilience premium” accrues to firms that have earned it. n nFinally, consider public–private resilience compacts in exposed sectors (energy, agriculture, critical infrastructure). Where governments co-invest in adaptation and transition, they should require transparent, verifiable sustainability strategies and metrics. Done properly, this channels scarce public funds to the firms most likely to deliver system-wide risk reduction. n nAnd for investors? n nIntegrate ESG variables where they belong – in risk forecasting and scenario analysis. Look for disclosure quality, governance of sustainability risks, and evidence of real operating practices: employee safety and retention, supplier diversification, community engagement in sensitive regions, and capex aligned with transition plans. In stewardship, prioritise board oversight of climate and social risk, escalation pathways for non-responsive issuers, and clear asks on assurance and data quality. n nNone of this implies ESG strength immunises firms against shocks. But it does suggest something consequential for global markets: responsibility is not a cost in the aggregate. It’s a capability – one that lowers the odds of catastrophic downside and improves recovery speed when the inevitable happens. n nPolicy is moving fast. So are the risks. The evidence shows that firms taking sustainability seriously are not just “doing good”. They are managing risk in a world of compounding uncertainty. That is a message for regulators shaping disclosure regimes, for investors allocating capital across volatile geographies, and for boards deciding whether sustainability is a side-office function or a core competency.