Corporate social responsibility and idiosyncratic volatility: a dynamic approach with environmental, social and governance considerations

PurposeThis study aims to examine the dynamic relationship between corporate social responsibility (CSR), environmental, social and governance (ESG) performance and environment-based executive compensation (EBEP) and firm-specific risk, by providing an integrated analysis of all three sustainability dimensions and their differentiated temporal effects on idiosyncratic volatility (IVOL).Design/methodology/approachThe analysis uses a dataset of S&P 500 nonfinancial firms covering the period from 1983 to 2024. To capture the short- and long-term dynamics between sustainability-related variables and IVOL, the study uses the local projections (LP) method, which allows flexible estimation of impulse response functions without imposing dynamic restrictions. Our empirical setting also accounts for endogeneity by incorporating the Generalized Method of Moments (GMM) analysis into the LP framework.FindingsThe results show that CSR engagement reduces IVOL, especially in the medium term. ESG helps reduce risk as these practices become institutionalized. EBEP triggers short-term volatility, but it ultimately leads to persistent risk reduction. Robustness tests confirm these dynamics. Notably, the interaction between EBEP and CSR leads to a pronounced and persistent reduction in IVOL.Originality/valueThis study addresses a gap in the literature by uncovering the differentiated and time-varying effects of sustainability strategies on firm-specific risk, an underexplored area. It also introduces EBEP as a novel governance mechanism and demonstrates its synergistic effect with CSR in sustaining long-term risk reduction. Methodologically, the use of LP, along with a GMM-based analysis, provides a flexible and forward-looking estimation of risk trajectories and a valuable guidance to balance sustainability with risk management.