Disaggregated financial risk and ESG performance: firm-level evidence from Malaysia

In today’s business landscape, ESG (Environmental, Social, and Governance) performance become a critical benchmark for corporate responsibility, risk management, and long-term value creation, particularly in emerging markets such as Malaysia. This study examines the disaggregated relationship between financial risk and ESG performance among publicly listed non-financial Malaysian firms. Despite the emphasis on corporate sustainability, the interplay between ESG performance and distinct financial risk types namely market, liquidity, credit, and operational risk remains underexplored, especially in emerging markets. Prior research often adopts an aggregated perspective, potentially obscuring nuanced risk-specific effects. Grounded in Stakeholder and Signaling Theories, this study addresses this gap through a dimension-specific analysis. Using a panel dataset of 1,205 firm-year observations from 2018 to 2024 sourced from Refinitiv Eikon, the study employs panel-data estimation techniques to assess how disaggregated financial risks influence ESG performance. The findings reveal that market and liquidity risks are negatively associated with ESG performance, while credit risk exhibits a positive association, suggesting that financially constrained firms may strategically leverage ESG initiatives to enhance reputation and stakeholder trust. This research contributes to the ESG-finance literature by providing evidence from a developing market context and highlights ESG integration as a strategic tool for financial risk management.