The Impact of ESG Risks on Product Recalls

As Environmental, Social, and Governance (ESG) risks gain prominence, their operational implications demand greater attention. While ESG considerations are often tied to reputational and financial outcomes, their impact on tangible business processes, such as product recalls, has been less explored. This study bridges that gap by examining the relationship between ESG risks and recall events, emphasizing how ESG risks interact with consumer feedback to provide a more comprehensive understanding of recall dynamics. Leveraging artificial intelligence (AI) to assess consumer sentiment, we demonstrate how the integration of advanced information systems into ESG risk management equips firms with enhanced capabilities to detect, assess, and mitigate operational vulnerabilities. Analyzing 2,894 manufacturer-month observations from 22 U.S. automotive manufacturers over a decade, we find that higher ESG risk ratings significantly increase the likelihood of product recalls. Moreover, we find that consumer complaints amplify recall risks, highlighting the interplay between ESG risks and external stakeholder concerns.