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Avoiding Harm by Doing Good. The Substantive Role of ESG Payments for Preventing ESG Misconduct

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  • Emma García‐Meca
  • Jennifer Martínez‐Ferrero
  • Nazim Hussain

Abstract

This paper examines whether an ESG‐based compensation policy plays a substantive or symbolic role in the prevention of firm ESG‐related misconduct. We anticipate that companies linking ESG to board compensation will experience fewer ESG‐related misconducts, aiming to avoid adverse consequences, mitigate market reactions, and minimize harm to stakeholders. We also expect that institutional ownership strengthens this relationship. By analyzing a sample of European firms between 2015 and 2020, we found that boards with an ESG‐linked compensation policy reduce irresponsible actions, confirming the substantive role of ESG‐linked compensation in curbing ESG misconduct. Our findings also show a complementary effect of institutional investors in this association. Finally, we found that variations in negative ESG media coverage of misconducts that result from undertaking ESG‐linked compensation policy can be explained by differences in legal systems and stakeholder orientation between countries. Specifically, our results suggest that ESG‐linked compensation only plays a meaningful substantive role in constraining ESG wrongdoing in civil law countries and those characterized by greater public enforcement, increased control over corruption, and higher environmental awareness.

Suggested Citation

  • Emma García‐Meca & Jennifer Martínez‐Ferrero & Nazim Hussain, 2025. "Avoiding Harm by Doing Good. The Substantive Role of ESG Payments for Preventing ESG Misconduct," Business Strategy and the Environment, Wiley Blackwell, vol. 34(4), pages 4354-4371, May.
    • Handle: RePEc:bla:bstrat:v:34:y:2025:i:4:p:4354-4371
    DOI: 10.1002/bse.4207
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