The double-edged sword of ESG in Australia: risk or resilience? The mediating role of earnings management

Purpose This study investigates the impact of Environmental, Social, Governance (ESG) overall score and its pillars on firm risk and the mediating role of earnings management. Design/methodology/approach The research applies Generalised Method of Moments (GMM) regression to address endogeneity in a panel of Australian-listed firms from 2014 to 2023. Findings The findings reveal that higher ESG scores are associated with lower firm risk, with governance and social pillars exerting the most substantial immediate effects. In contrast, the environmental pillar demonstrates a delayed risk-reducing impact, reflecting long-term benefits rather than short-term volatility reduction. Moreover, the study identifies earnings management as a significant mediator that partially offsets ESG's stabilising effects, highlighting that firms with strong ESG practices are less likely to engage in accrual-based earnings management, thus reducing risk. Practical implications These findings have critical implications for investors, regulators, and policymakers. They underscore the importance of pillar-level ESG evaluation, long-term orientation in environmental assessments and integrating financial transparency into ESG frameworks. Originality/value This study contributes to the extant knowledge of ESG overall and the individual pillar effect on firm risk in Australian companies, highlighting the mediating role of earnings management (EM). By identifying earnings management as a partial mediating mechanism, the study extends agency and stakeholder theories beyond direct ESG–firm risk association through the lens of financial reporting behaviour. This integrated framework bridges sustainability and earnings management literatures, offering a more comprehensive theoretical understanding of how ESG performance is related to firm risk.

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Publication Details

Journal
Journal of Economics and Development
Published
2026-01-20
DOI
https://doi.org/10.1108/jed-08-2025-0422
Primary Topic
Corporate Social Responsibility Reporting
Type
article
Field-Weighted Citation Impact
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article

The double-edged sword of ESG in Australia: risk or resilience? The mediating role of earnings management

Thi Le, Tanvir Bhuiyan, Ariful Hoque, Thuong Thi Le
Journal of Economics and Development
Corporate Social Responsibility Reporting
article

The double-edged sword of ESG in Australia: risk or resilience? The mediating role of earnings management

Thi Le, Tanvir Bhuiyan, Ariful Hoque, Thuong Thi Le
article en

Abstract

Purpose This study investigates the impact of Environmental, Social, Governance (ESG) overall score and its pillars on firm risk and the mediating role of earnings management. Design/methodology/approach The research applies Generalised Method of Moments (GMM) regression to address endogeneity in a panel of Australian-listed firms from 2014 to 2023. Findings The findings reveal that higher ESG scores are associated with lower firm risk, with governance and social pillars exerting the most substantial immediate effects. In contrast, the environmental pillar demonstrates a delayed risk-reducing impact, reflecting long-term benefits rather than short-term volatility reduction. Moreover, the study identifies earnings management as a significant mediator that partially offsets ESG's stabilising effects, highlighting that firms with strong ESG practices are less likely to engage in accrual-based earnings management, thus reducing risk. Practical implications These findings have critical implications for investors, regulators, and policymakers. They underscore the importance of pillar-level ESG evaluation, long-term orientation in environmental assessments and integrating financial transparency into ESG frameworks. Originality/value This study contributes to the extant knowledge of ESG overall and the individual pillar effect on firm risk in Australian companies, highlighting the mediating role of earnings management (EM). By identifying earnings management as a partial mediating mechanism, the study extends agency and stakeholder theories beyond direct ESG–firm risk association through the lens of financial reporting behaviour. This integrated framework bridges sustainability and earnings management literatures, offering a more comprehensive theoretical understanding of how ESG performance is related to firm risk.

Journal of Economics and DevelopmentVol. 28(1)
Murdoch University (AU), Thuongmai University (VN)
Openalex Percentile: Top 85%
Corporate Social Responsibility Reporting
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