When Does SDG Adoption Increase ESG Risk? The Mediating Role of Risk Management

ABSTRACT Corporate engagement with the United Nations' Sustainable Development Goals (SDGs) has expanded rapidly, yet its implications for firms' environmental, social and governance (ESG) risk remain insufficiently understood. Prior research has focused on the performance outcomes of SDG adoption while largely overlooking its potential to generate ESG risk. This study addresses this gap by analysing the relationship between SDG‐aligned ESG practices and ESG risk through the lens of legitimacy theory. We distinguish between symbolic and substantive alignment and test whether ESG risk management mediates this relationship. Using a panel of 1589 firms, we examine the circumstances in which SDG adoption can generate ESG risk. Our findings suggest that SDG‐aligned practices can increase ESG risk when they are not supported by effective risk management, whereas substantive SDG alignment embedded in robust ESG risk management mitigates ESG risk. These findings provide insights for managers, investors and regulators seeking to develop credible sustainability strategies.