When do ESG controversies erode firm value? The role of investor protection and geopolitical risks

Amid the growing importance of corporate responsibility, this study examines the association between firm-level environmental, social, and governance (ESG) controversies and financial performance. We argue that the severity of market punishment is not uniform but depends critically on the institutional environment. Accordingly, the study examines how country-level investor protection and geopolitical risks moderate this association. Drawing on 12,606 firm-year observations from 12 Asia-Pacific nations over the 2013–2023 period, we employ a fixed-effects regression model and find that ESG controversies adversely affect financial performance. This association is more pronounced in nations with weak investor protection and during periods of low geopolitical stress, highlighting the importance of macro-level factors in shaping the penalising effect of controversies. The findings remain robust to endogeneity concerns, alternative measures, sample-selection bias, and other sensitivity analyses. Further analyses reveal that the adverse effect of controversies is contingent on firms’ stakeholder engagement and ESG commitment. Moreover, the financial penalty is more pronounced for firms that actively engage stakeholders and maintain public ESG commitments, suggesting that higher visibility increases accountability. Thus, the study offers actionable managerial and policy implications by challenging the assumption of homogeneous stakeholder reactions and highlighting the relevance of institutional factors in understanding the relationship between ESG controversies and financial performance.