The Impact of ESG Controversies on Financial Risk: A Multi-Country and Multi-period Analysis

This chapter examines the impact of environmental, social, and governance (ESG) controversies on a firm's financial risk. The analysis is performed in different regions (Europe and the United States), and across different periods (before and during-post-COVID-19 pandemic). Results spanning from 2014 to 2023 show that firms' exposure to more controversies, especially in Europe and in the post-COVID era, is associated with an increase in financial risk, which is determined by five risk measures. This suggests that investors are more attentive to ESG issues and related controversies in countries where green regulations are stricter and in periods characterised by heightened sensitivity to sustainability-friendly investment choices. The findings are important for companies and regulators: companies to minimise the impact of exposure to ESG controversies and regulators to address these issues effectively.