ESG performance and controversies effects on dividend payout ratio under the CSRD framework: evidence from the EU

Purpose This study aims to examine how environmental, social and governance (ESG) performance and ESG controversies influence dividend payout decisions among European listed firms, with particular emphasis on the effect of the Corporate Sustainability Reporting Directive (CSRD). Design/methodology/approach Using a balanced panel of 550 European non-financial listed firms and 6,050 firm-year observations covering the period 2014–2024, the study employs fixed-effects, mixed-effects and instrumental-variables (2SLS) estimation methods. Dividend policy is proxied by the dividend payout ratio, while ESG performance is measured using aggregate ESG scores and individual environmental, social and governance pillars. ESG controversies score and a CSRD regulatory dummy are incorporated to capture reputational shocks and regulatory pressure. Findings The study indicates that ESG performance is positively correlated with dividend payout ratios, primarily driven by environmental and social factors. ESG controversies do not directly and statistically significantly affect dividend payouts, even after controlling firm-specific heterogeneity and financial fundamentals. Importantly, CSRD plays a significant moderating role: while dividend payouts are higher during CSRD-related years, the positive association between ESG performance and dividends weakens under CSRD pressure, suggesting a reallocation of resources toward compliance, disclosure and sustainability investments during the regulatory transition period. Originality/value This study advances the ESG-dividend literature by integrating ESG performance, ESG controversies and mandatory sustainability reporting within a unified empirical framework. It provides early evidence on how the CSRD reshapes the ESG-dividend nexus, highlighting regulatory pressure as a key boundary condition in the sustainability-payout relationship.