["Business Strategy and the Environment, EarlyView. ", "\nABSTRACT\nThis paper investigates the impact of environmental, social, and governance (ESG) performance on downside risk in the banking sector, with a particular focus on banks in the Gulf Cooperation Council (GCC) countries. Using a panel dataset of publicly listed banks from 2010 to 2023, we develop a dynamic risk assessment framework using GJR‐GARCH‐MIDAS and DCC‐MIDAS models to jointly estimate bank‐level downside risk and marginal systemic risk (ΔCoVaR) while accounting for the influence of macroeconomic indicators and internal governance mechanisms. Our results show that ESG scores are significantly associated with lower systemic risk contributions across all models, with reductions in ΔCoVaR ranging from 3.7% to 5.3% at the 1% tail quantile. This ESG‐risk mitigation effect is particularly evident for banks with higher exposure to credit and market risk. Furthermore, we find that governance attributes play a critical moderating role. Specifically, ESG's risk‐reducing effect is significantly amplified in banks with greater board independence, more frequent board meetings, higher female representation on boards, and reduced CEO duality. Our findings offer significant policy implications for both regulators and investors. Incorporating ESG considerations into regulatory frameworks—such as supervisory assessments and capital adequacy stress testing—can enhance the systemic resilience of the banking sector. Our dynamic modeling approach contributes to the literature by effectively capturing both long‐term structural drivers and short‐term fluctuations of systemic risk within a GARCH‐MIDAS framework.\n"]