Name: D.P. Warne, Kunal Kumar
Country: India

Year: 2026
Volume: Volume-13, Issue-2, Year-2026 ( july- dec)
Page Number: 78-85
DOI: https://doi.org/10.5281/zenodo.23052943

Environmental, social, and governance (ESG) considerations have moved from the periphery of corporate reporting to the centre of financial decision-making, yet the precise channels through which ESG performance shapes corporate financial risk remain fragmented across disciplines and empirical settings. This paper undertakes a conceptual review of the ESG-financial risk literature with two specific objectives: first, to synthesise the theoretical and empirical evidence linking ESG performance to different dimensions of corporate financial risk, and second, to develop an integrative conceptual framework that explains the mechanisms through which environmental, social, and governance performance individually and jointly influence systematic risk, idiosyncratic risk, credit and default risk, and operational risk. Drawing on stakeholder theory, risk-mitigation (insurance-like) arguments, agency theory, and legitimacy theory, the paper argues that ESG performance operates as a risk-management mechanism that reduces information asymmetry, strengthens stakeholder relationships, and buffers firms against regulatory, reputational, and operational shocks. The review also highlights persistent inconsistencies in measurement, rating methodology, and contextual factors that complicate cross-study comparison. The proposed framework is intended to guide future empirical work and to offer practitioners and policymakers a structured basis for evaluating ESG-related risk exposure. The paper concludes by outlining the boundary conditions of the framework and directions for subsequent empirical validation.

Keywords: ESG performance; corporate financial risk; sustainability risk; stakeholder theory; risk mitigation; conceptual framework