Environmental, Social, and Governance Controversies and Firm Performance: Moderating Role of Governance Mechanisms

Abstract

In the present research, the relationship between ESG (environmental, social, and governance) and a firm's performance is looked into in the context of corporate governance mechanisms, i.e., board independence and ESG practices, as a moderator. ESG disputes frequently occur when corporations' actions violate moral and environmentally friendly standards. ESG controversies represent the credibility of an organization and pose functional hazards, which can significantly impact its financial position. According to the Pakistan Institute of Corporate Governance (PICG) report, ESG remains an unfamiliar idea and business focus in Pakistan. ESG integration is hampered by common misconceptions, a reluctance for more restrictions, and a lack of knowledge of the relevance and importance of ESG. Obviously, there is an overwhelming need to protect the status quo, which prevents businesses from completely meeting their environmental, social, and governance (ESG) objectives. We used quantitative tools to analyze data from 419 non-financial firms listed on the Pakistan Stock Exchange (PSX) from 2014 to 2023, and the data is readily available. Based on our studies, there is a significant negative relation between ESG controversies & corporate performance. However, good corporate governance standards & institutional ESG plans mitigate these negative consequences and can transform these controversies into opportunities for advancement and repo-building. Legislators, business strategists, and investors can substantially benefit from these findings, which underscore the importance of governance for handling ESG controversies and improving the firm's versatility and endurance. Hence it can be recommended that the same relationship with different data set could be tested in other widely geographically distributed areas other than Pakistan.