Dissecting the ESG Framework: an in-depth analysis of Environmental, Social, and Governance controversies and their impact on firm value

This study delves into the impact that Environmental (E), Social (S), and Governance (G) controversies and have on firm value. While previous literature has predominantly examined ESG controversies as a collective entity, this study adopts a novel approach by dissecting the effects of controversies within each ESG pillar individually. To achieve this, a dataset comprising 293 publicly listed European firms is used, yielding a total of 4,395 firm-year observations spanning from 2008 to 2022. The empirical findings from the regression analyses exhibit different results for the three pillars. The findings concerning the Environmental and Social pillars confirm the anticipated negative effect of controversies on firm value. However, when exploring the moderating role of the ESG score, divergent outcomes arise. Surprisingly, in the case of the Environmental pillar, a positive correlation between ESG controversies and firm value emerges, with the additional revelation that this positive impact is moderated when firms exhibit a high Environmental score. The results obtained related to the Social pillar, instead, do not attain statistical significance. This outcome can be attributed to the diverse range of controversy categories encompassed within the Social pillar, warranting further exploration and refinement. Regarding the Governance pillar, the findings align with both the formulated hypotheses. They suggest that Governance controversies have a detrimental impact the company's value, and this negative effect is mitigated when companies possess a commendable Governance score. This research contributes to a nuanced understanding of how ESG controversies affect firm value, emphasizing the need for a granular examination of each ESG pillar. Furthermore, a comprehensive examination has been conducted on the Environmental pillar, assessing the impact of Environmental controversies on CO2 equivalent emissions. The findings reveal that companies typically reduce CO2 emissions following controversies, providing evidence of corrective measures implemented as a result of the disputes.