ESG and share price volatility in energy sector firms: does the development phase of countries matter?

Abstract

Purpose

The global energy sector draws significant stakeholder attention due to never-ending controversies surrounding its environmental impacts. Investors’ response to such controversies causes direct financial implications for these firms. Furthermore, environmental, social and governance (ESG) sensitivity, which is likely to safeguard the energy sector firms from such controversies, is itself conditional to the development stage of a country and its regulatory environment. Therefore, this study aims to investigate if the influence of ESG on the share price volatility (SPV) of energy sector firms is subject to the development stage of the countries.

Design/methodology/approach

The study investigates nine years of panel data of 93 global energy sector firms from developing and developed nations. Using dynamic two-way fixed effects estimation and computing robust standard errors to obtain the econometric results.

Findings

The main finding reveals that the impact of ESG on SPV is, indeed, subject to the development stage of the nations. Similar results are observed for the effects of the social dimension of ESG on SPV. While ESG impacts the SPV negatively for firms in developing economies, the impact is the opposite for firms in developed nations. In other words, strong ESG propositions induce share price stability for developing countries while destabilizing the firms in developed nations.

Practical implications

The policymakers should further streamline the regulations and policies related to ESG adoption and adherence. In practice, the energy sectors should streamline their operations. Firm managers, especially in the energy sector, should devise strategies with ESG as an essential component to safeguard their firms against environmental and market volatility and adversatives. The firms in developing nations should further strengthen their social dimension of ESG to foster social equity and harmony.

Originality/value

The study contributes through its niche investigations on the energy sector, which is very important for the world economy. The study is relevant in the current scenario when the world faces a severe energy crisis due to global supply chain issues.

Citation

Singh, K. and Jaiwani, M. (2024), "ESG and share price volatility in energy sector firms: does the development phase of countries matter?", International Journal of Energy Sector Management, Vol. 18 No. 5, pp. 956-979. https://doi.org/10.1108/IJESM-05-2023-0033