The impact of ESG controversies on the financial performance of firms: An analysis of industry and country clusters

Stakeholders have become increasingly interested in sustainable practices, leading to intense investigation in the literature of their effects on companies' returns. However, not much information is available about the effect of environmental, social, and governance (ESG) controversy on companies' financial performance. Inappropriate social behavior and environmental scandals attract attention in the media and, consequently, among investors. Therefore, this study analyzes the impact of ESG controversy on companies' return on equity, identifying differences between companies that operate in different clusters such as environmentally sensitive industries (ESI) or non–environmentally sensitive industries and emerging/developed countries. To this end, we investigate 625 publicly owned companies for the period 2011 to 2022, using a four-dimensional hierarchical linear regression model, comprising time, firms, industries, and countries. ESG controversies negatively impact the financial performance of companies operating in ESI and developed countries.