Firm-level political risk and ESG controversies: international evidence

Purpose This study aims to examine the impact of firm-level political risk on ESG controversies. Design/methodology/approach This study uses a sample of 12,517 firm-year observations from G7 countries between 2002 and 2021. Panel ordinary least squares regression is used to estimate the impact of firm-level political risk on ESG controversies. Findings This study finds a significant impact of firm-level political risk on ESG controversies, indicating that an increase in firm-level political risk leads to an increase in ESG controversies. The findings support the moral disengagement perspective and the Cressey Fraud Triangle, which explains that negative perceptions due to an adverse political environment lead to unethical firm behaviour. The study further identifies that ESG-linked CEO compensation moderates the underlying relationship. The impact of firm-level political risk is stronger for firms that lack environmental initiatives, high managerial power and low board monitoring. Research limitations/implications This study is limited to G7 countries. However, this study provides future research avenues in political risk and ESG controversies, especially in different economic conditions, such as developing countries. Practical implications This study offers policy and practical implications for policymakers and top management teams in managing political risks for firms, thus mitigating ESG controversies. Originality/value The study advocates for establishing strategies to reduce ESG controversies during high political uncertainty. To the best of the authors’ knowledge, this study is the first to examine the effect of firm-level political risk on ESG controversies.