Managerial Ability and ESG Risks: The Moderating Effect of Internal Control Quality

The 2017 COSO framework highlights the increasing need to incorporate environmental, social, and governance (ESG) considerations into firms’ internal control and risk management practices. Top managers play a crucial role in risk management and control. However, it remains unclear whether managerial ability affects ESG risk management. This study investigates the relationship between firms’ ESG risk exposure and managerial ability, and examines whether the quality of internal control (ICQ) influences this relationship. Based on panel data from Chinese listed firms between 2008 and 2022, we found that firms led by more capable managers have lower overall ESG risk exposure, including reduced environmental, social, and governance risks. Furthermore, our findings indicate that higher ICQ strengthens the association between managerial ability and ESG risks. Specifically, an analysis of the five internal control components showed that the mechanisms through which ICQ influences this relationship involve enhancing control environments, risk assessment, control activities, and information and communication channels. Further analysis indicated that the moderating effect of ICQ on the relationship between managerial ability and ESG risks is influenced by management power and the effectiveness of external governance mechanisms.