ESG Controversies and Firm Value: Moderating Role of ESG Performance*

Abstract

This study investigates the impact of a firm's environmental, social, and governance (ESG) controversies on its value and examines the moderating role of ESG initiatives in mitigating this impact. It further explores how this moderating effect varies based on factors such as reputational risk, external monitoring, agency motivations, and the recurrence of controversies. Using a novel machine learning approach, this study measures ESG controversies among publicly traded Korean firms by analyzing over 20 million news articles from major Korean media outlets. The findings indicate that ESG controversies negatively affect firm value, but this adverse impact is mitigated by stronger ESG performance, underscoring the insurance-like role of ESG. The moderating effect is particularly significant for firms facing high reputation risk, greater external monitoring, or with ESG activities that are less likely to be driven by agency motives. Moreover, non-repetitive ESG controversies exert a more substantial negative effect on firm value compared to repetitive ones, highlighting the crucial role of ESG in these situations. Consistent results are observed using short-term firm value measures, such as cumulative abnormal returns surrounding the release of ESG controversy news. Overall, this study contributes to the ESG literature by demonstrating that ESG can provide shareholders with an insurance-like benefit, supporting stakeholder theory.