The Impact of ESG Controversies on Abnormal ESG Performance: Evidence from China

Abstract

This study examines the association between environmental, social, and governance (ESG) controversies and abnormal ESG performance using a sample of listed Chinese firms from 2015 to 2021. We find a significant positive association between ESG controversies and abnormal ESG performance levels. Specifically, management cost is the channel through which ESG controversies affect abnormal ESG performance. Furthermore, heterogeneity tests indicate that financial performance and executive green cognition have a significant impact on the ESG controversies-abnormal ESG association. Strong financial efficiency and customer relationship stability mitigate the negative effects of ESG controversies. Moreover, while ESG controversies cannot affect environmental subsidies, ESG controversies are associated with higher firm profit volatility, lower asset utilization efficiency, and reduced credit availability, which leads to deteriorating financial performance and increased operational risks. However, analyst attention and investor scrutiny can positively moderate these negative effects. The findings of this study enrich relevant theories and empirical evidence, as well as provide new perspectives and policy suggestions for firm ESG performance management practices in China and other emerging economies.