Comillas Pontifical University. Madrid (Spain)
July 3rd, 2026
Summary:
This thesis investigates the relationship between ESG performance, corporate financial outcomes, and idiosyncratic risk. It integrates both return and risk dimension and introduces the Idiosyncratic Equity Premium (IEP) to assess whether firm-specific risk is priced. A thorough literature review is conducted to define and examine current explicit and implicit valuation channels under the lens of the discounted cash-flow (DCF) model. Firm value changes only through risk-adjusted discounting in the DCF model. ESG affects valuation by altering, firm specific (idiosyncratic) risk, and market wide (systematic) risk, which affects firm valuation, according to the DCF model through cash flow risk and the cost of capital, respectively. We do not treat ESG metrics as a standalone factor, but we jointly analyze the relation among ESG, financial performance, idiosyncratic risk and risk with respect to asset pricing. In this way, the thesis fully integrates ESG-Risk-Return framework. The IEP is introduced as an idiosyncratic quantifiable factor which measures directly compensation for fir-specific risk. This factor goes beyond standard idiosyncratic volatilities measures as it decomposes return shock into firm-specific shocks, market risk and microstructure components especially important for price discovery in equity markets. Based on SP 500 firms, large–scale panel data is examined (2004–2023), using Refinitiv, Bloomberg, and FactSet data. This provides robust inference across market regimes, as the data set sample is divided into three different economically meaningful sub-samples. In this manner, ESG relevance is explicitly treated within the pre-2015 and post- 2016 period. Methodology includes panel regressions and asset pricing models (CAPM, Fama-French, Carhart). Idiosyncratic risk is measured via residual returns and volatility. Empirical results demonstrate that ESG performance is a financially material driver of both risk and asset pricing. It reduces firm-specific volatility, improves financial stability, and crucially affects expected returns through the pricing of idiosyncratic risk, especially in the post-Paris regulatory environment. Including ESG pillars as explicit explanatory variables augments granularity with respect to regime shifts and relevant economic context. Provides integrated ESG-riskperformance analysis, introduces IEP, and delivers robust long-term empirical evidence. ESG improves risk-adjusted returns and hence can be used as a risk-management overlay. The case supports ESG disclosure standardization. It is a financially material driver that reduces firm-specific risk and influences expected returns through the pricing of idiosyncratic risk.
Descriptors: Economic Sciences, Econometrics,
Keywords: ESG Investment, Sustainability, SDGs, Corporate Financial Performance, Idiosyncratic Risk, CSR, Tail-Risk.
Citation:
P. Paraskevas, "ESG Performance, Corporate Financial Outcomes, and Idiosyncratic Risk: A Critical Review and Empirical Assessment within the S&P 500 Index", PhD. dissertation, Comillas Pontifical University, Madrid, Spain, 2026.
