Do ESG Controversies Matter for Firm Value? Evidence from International Data

Can an ESG controversy increase value, and who may benefit from that « controversy premium »?

Amal Aouadi and Sylvain Marsat study the valuation effects of ESG controversies in their paper « Do ESG Controversies Matter for Firm Value? Evidence from International Data ».

They explore whether ESG controversies affect Tobin’s Q directly or mainly through interaction with corporate social performance (CSP), and whether stakeholder attention changes this link.

They rely on an international panel of 4,312 firms (58 countries, 2002 to 2011) from Thomson Reuters Asset4 where ESG controversies occur in 19.8% of firm-years to show that:

• ESG controversies are positively associated with market value in basic regressions, but the direct controversy term becomes small and insignificant when the model includes the CSP interaction.
• The CSP interaction is positive and robust, slightly higher in the simple interaction model than in the one with firm fixed effects. In the fixed-effects context, the ESG controversy term itself is negative, implying the net controversy effect depends on CSP.
• Conditional effects strengthen with visibility, with the magnitude for large firms more than 3 times that of small ones. It is also larger under high Google search volume.
• Controversies are directly costly in accounting terms, especially for operating ROA, net profit margin, and cash holdings, yet the CSP interaction is positive for each, mirroring the valuation results.
• The evidence supports a conditional narrative: controversies attract attention, which rewards strong-CSP firms under scrutiny, while controversies without strong CSP are value-damaging.

This article suggests investors should model ESG controversies as state-dependent risk, as the interaction with CSP and attention proxies can change the sign and size of estimated effects.

It implies high-CSP issuers may be partly insulated from controversies in market value terms, especially when they are highly visible. A practical takeaway is to treat CSP as reputational capital that becomes most valuable under scrutiny.

The authors are explicit that causal interpretation is difficult: they flag endogeneity concerns, and note that yearly data and provider restrictions can create external validity issues.

They also highlight that their controversy measure is coarse, based on whether at least one controversy occurred rather than severity.