Navigating the ESG Paradox: Strategic Pathways Between Innovation and Washing Under Stakeholder Scrutiny

ABSTRACT As firms increasingly incorporate environmental, social, and governance (ESG) concerns into their strategic agendas, stakeholder legitimacy—an audience‐conferred judgment of organizational appropriateness—has become pivotal. We theorize legitimacy as expanding a hybrid response portfolio in which firms may pursue substantive change (business model innovation [BMI]) alongside symbolic communication that can become ESG washing when disproportionate to operations. Integrating legitimacy, institutional, and signaling perspectives, we argue that institutional pressures allocate effort across these responses rather than forcing an either–or choice. Using a two‐wave survey of South Korean firms ( N = 478), we find that legitimacy generally promotes BMI and deters ESG washing. Regulatory pressure strengthens the legitimacy—BMI link and amplifies the deterrent effect of legitimacy on washing, while normative pressure attenuates both relationships, consistent with a shift toward symbolic compliance. These findings highlight the ethical ambivalence of legitimacy and demonstrate how institutional context shapes ESG behavior. The study contributes to corporate responsibility literature by clarifying when legitimacy drives innovation versus deception and by bridging signaling, legitimacy, and institutional perspectives. We also offer implications for managers balancing ethical responsibility with signaling and for policymakers designing regulations to curb ESG washing.