Firm value and risk: how relevant are ESG factors and ESG controversies?

Purpose This study investigates the impact of ESG (Environmental, Social, and Governance) performance and ESG-related corporate misconduct on firm value and risk. In particular, it explores whether strong ESG performance can mitigate the negative consequences of adverse ESG events. Design/methodology/approach The analysis is based on a robust international panel dataset from LSEG, covering 10,212 companies across 42 countries from 2002–2021. Using panel regression techniques, we examine the effects of ESG scores and ESG controversies on market valuation and risk, while controlling for firm-level heterogeneity, types of controversies, and temporal, sectoral, and geographic fixed effects. Findings The findings reveal that ESG controversies significantly reduce firm value and increase risk levels. However, companies with high ESG scores exhibit a moderating effect: they experience less severe impacts, particularly regarding risk exposure. After controlling for heterogeneous firm value and risk levels, corporate controversies, and different geographical, industry, and period specifications, the results remain significant. Practical implications These findings highlight the strategic relevance of ESG engagement for risk management and value preservation. Firms that invest in ESG practices are better equipped to weather the reputational and financial fallout of adverse events and can enjoy a competitive advantage in the capital markets. Originality/value The paper’s novelty lies in its analysis of ESG practices, controversies, and their impact on firm value and risk, highlighting direct and indirect effects across developed and emerging markets. It reconciles conflicting findings by showing that ESG’s positive indirect effect applies only to high-valued firms and demonstrates its heterogeneous impact on firm value and risk. Finally, it provides novel insights into how ESG scores’ moderating influence varies with controversy severity.