From ESG risk to financial strength: How controversy management and corporate governance shape resilience

Our study examines whether effective management of Environmental, Social, and Governance (ESG) controversies reduces the likelihood of corporate financial distress. Drawing on legitimacy theory and risk management perspectives, we conceptualise ESG controversy handling as a strategic capability that enhances firm resilience. Using a panel dataset of 2,305 firm-year observations from FTSE All-Share companies (2010–2023), we find that firms that manage ESG controversies more effectively exhibit significantly lower levels of financial distress. This relationship remains robust across multiple model specifications, including entropy balancing, propensity score matching, and Heckman two-stage regressions. Further analyses reveal that the mitigating effect of controversy handling is more pronounced in smaller firms, non-environmentally sensitive industries, and firms with female dominated boards. These findings suggest that controversy management may be leveraged more effectively in contexts with higher flexibility or lower external scrutiny. Our results underscore the importance of proactive ESG risk management as a strategic tool to preserve financial health, particularly amid increasing stakeholder expectations for corporate responsibility. Our research offers novel empirical evidence on the financial implications of ESG controversy management, with important implications for corporate governance, sustainability strategy, and risk mitigation. • Firms that handle ESG controversies more effectively show notably lower levels of financial distress. • The mitigating effect of controversy handling is more pronounced in smaller firms, non-environmentally sensitive industries, and firms with female dominated boards. • Proactive ESG risk management is essential as a strategic tool to maintain financial health.