Climate Governance as a Buffer Against <scp>ESG</scp> Controversies: Implications for Firm Performance

ABSTRACT We examine whether climate governance acts as a buffer against the adverse performance effects of ESG controversies. Motivated by the growing financial salience of controversy risk and the increasing importance of climate‐related oversight, we investigate whether firms with stronger climate governance are better able to withstand the penalties associated with environmental, social, and governance incidents. Using a sample of US‐listed nonfinancial firms, we estimate dynamic regression models incorporating lagged dependent variables to account for persistence in firm performance and to improve identification. ESG controversies are measured using the controversies score, and climate governance is captured through a composite index of formal climate‐related oversight mechanisms. Our results indicate that ESG controversies are negatively associated with firm performance, whereas climate governance exhibits a positive relation with both market‐based and accounting‐based measures. More importantly, we find that climate governance weakens the negative impact of ESG controversies on firm performance, consistent with a buffering effect driven by enhanced oversight, accountability, and strategic responsiveness. Overall, our evidence shows that climate governance is not merely a disclosure‐related attribute, but a governance mechanism that helps preserve firm value in the face of ESG‐related shocks, with implications for theory, corporate practice, and regulatory design.