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From ESG risk to financial strength: How controversy management and corporate governance shape resilience

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  • Sastroredjo, Probowo Erawan
  • Suganda, Tarsisius Renald

Abstract

Our study examines whether effective management of Environmental, Social, and Governance (ESG) controversies reduces the likelihood of corporate financial distress. Drawing on legitimacy theory and risk management perspectives, we conceptualise ESG controversy handling as a strategic capability that enhances firm resilience. Using a panel dataset of 2305 firm-year observations from FTSE All-Share companies (2010–2023), we find that firms that manage ESG controversies more effectively exhibit significantly lower levels of financial distress. This relationship remains robust across multiple model specifications, including entropy balancing, propensity score matching, and Heckman two-stage regressions. Further analyses reveal that the mitigating effect of controversy handling is more pronounced in smaller firms, non-environmentally sensitive industries, and firms with female dominated boards. These findings suggest that controversy management may be leveraged more effectively in contexts with higher flexibility or lower external scrutiny. Our results underscore the importance of proactive ESG risk management as a strategic tool to preserve financial health, particularly amid increasing stakeholder expectations for corporate responsibility. Our research offers novel empirical evidence on the financial implications of ESG controversy management, with important implications for corporate governance, sustainability strategy, and risk mitigation.

Suggested Citation

  • Sastroredjo, Probowo Erawan & Suganda, Tarsisius Renald, 2026. "From ESG risk to financial strength: How controversy management and corporate governance shape resilience," Research in International Business and Finance, Elsevier, vol. 88(C).
    • Handle: RePEc:eee:riibaf:v:88:y:2026:i:c:s0275531926001650
    DOI: 10.1016/j.ribaf.2026.103438
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    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • M14 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Corporate Culture; Diversity; Social Responsibility
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance

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