Can extra-financial ratings serve as an indicator of ESG risk?

Abstract We examine whether extra-financial ratings are related to the probability of occurrence of adverse environmental, social and governance (ESG) events, and thus serve as an indicator of ESG-risk. We observe that a firm's global extra-financial performance is negatively related to its likelihood of dealing with adverse ESG-related events. However, for some CSR dimensions, the link between overall performance (strengths and concerns) and risk is positive, which is consistent with a compensation effect. We also observe an cross-dimensional effect whereby extra-financial performance in a specific CSR dimension can affect the probability of occurrence of adverse events associated with other dimensions. Results are robust to a number of tests.