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Article

ESG Controversies and the Financial Performance of MENA Firms: The Moderating Role of Board Characteristics

by
Bashar Abu Khalaf
1,*,
Munirah Sarhan Alqahtani
2 and
Maryam Saad Al-Naimi
1
1
Accounting & Finance Department, University of Doha for Science & Technology, Doha P.O. Box 24449, Qatar
2
Business School, Imam Mohammad Ibn Saud Islamic University, Riyadh 11564, Saudi Arabia
*
Author to whom correspondence should be addressed.
Sustainability 2025, 17(11), 5055; https://doi.org/10.3390/su17115055
Submission received: 21 April 2025 / Revised: 27 May 2025 / Accepted: 29 May 2025 / Published: 30 May 2025
(This article belongs to the Section Economic and Business Aspects of Sustainability)
Versions Notes

Abstract

This paper empirically investigates the moderating role of the firm’s board characteristics in the relationship between ESG controversies and firm performance. The collected sample includes 461 non-financial companies in 10 MENA countries from 2010 to 2023. Data were collected from Refinitiv Eikon Platform (LSEG). This empirical paper applied panel GMM regression to estimate the relationship. The paper controls for firm characteristics such as firm size and leverage while controlling for macroeconomic variables such as inflation and GDP. The results indicate that there is a negative impact of ESG controversies on the performance of firms in the MENA region. Moreover, the analysis of corporate governance’s moderating role reveals that both board independence and gender diversity substantially diminish the adverse effects of ESG controversies on firm performance, indicating that well-governed firms are more adept at mitigating risks linked to ESG-related controversies. Our results hold based on the robustness of the results.
Keywords:
ESG controversies; financial performance; corporate governance; panel GMM; MENA
JEL Classification:
G0; G3; M0; M4

1. Introduction

The connection between ESG controversies and financial performance is becoming increasingly significant, as businesses, investors, and regulators emphasize sustainability and corporate accountability [1]. ESG controversies, including environmental contraventions, governance scandals, or labor rights violations, may result in regulatory penalties, reputational harm, and diminished investor trust [2]. When corporations engage in such controversies, they frequently encounter decreases in stock prices, increased capital costs, and operational disruptions. Investors, especially those adhering to ESG-driven strategies, may divest from companies with inadequate ESG performance, thereby affecting their financial stability [3].
In addition to financial losses, ESG controversies can adversely affect a company’s long-term sustainability and market competitiveness [4]. Companies that actively manage ESG risks generally enjoy enhanced reputation, attract reliable investors, and maintain customer loyalty. Conversely, entities that neglect addressing ESG concerns may encounter persistent legal disputes, diminished consumer confidence, and decreasing profitability [5]. As the business world evolves towards enhanced transparency and accountability, firms that incorporate ESG factors into their risk management frameworks are more likely to achieve sustained success, while those neglecting these risks may have unstable financial consequences [6].
The purpose of examining the effects of ESG controversies on financial performance in the MENA region is to understand how environmental, social, and governance-related risks affect corporate profitability, investor sentiment, and overall market stability in this unique economic context while moderating for corporate governance. The MENA region is distinguished by swift economic advancement, heightened legislative emphasis on sustainability, and escalating investor responsiveness to ESG concerns [7]. Nevertheless, numerous enterprises in the region continue to encounter difficulties pertaining to corporate governance, environmental sustainability, and social responsibility [8]. This study analyzes the influence of ESG controversies—such as environmental infractions, labor rights abuses, and governance scandals—on financial outcomes and aims to clarify the degree to which ESG risks affect business financial performance. The results can assist firms, authorities, and investors in formulating more effective ESG strategies, thus ensuring long-term financial stability and sustainable economic growth in the region.
This empirical investigation provides several contributions to the literature on ESG controversies. Firstly, it enhances the existing literature on ESG controversies and financial success by focusing on the MENA region and integrating corporate governance as a moderating variable. Secondly, although many studies on ESG controversies have been undertaken in developed markets, emerging economies have received limited attention because regulatory frameworks and governance systems vary considerably. This study examines the effect of corporate governance on the relationship between ESG controversies and financial results, offering insights into whether robust governance measures help alleviate the adverse financial consequences of ESG controversies. Thirdly, the results provide significant insights for investors, policymakers, and corporate executives, highlighting the importance of governance mechanisms—such as board independence and board’s gender diversity—in protecting enterprises from ESG risks. This study addresses a deficiency in the ESG controversies literature pertaining to the MENA region and offers practical solutions for enhancing company sustainability and financial resilience.
The structure of the paper is as follows. First, the Introduction provides an overview of the topic. The second section is the Literature Review, which includes the theoretical background and the previous studies and hypothesis development sections. The third section is the Methodology, which includes the model used to investigate the relationship and the sampling procedure. Finally, the Conclusion section concludes the paper.

2. Literature Review

2.1. Theoretical Background

2.1.1. Stakeholder Theory

The stakeholder theory offers a robust framework for comprehending the connection between ESG controversies and financial success, especially when moderated by corporate governance [9]. The stakeholder theory, proposed by Freeman [10], posits that enterprises should account for the interests of all stakeholders—such as investors, employees, customers, regulators, and society at large—rather than concentrate exclusively on maximizing shareholder profit. This viewpoint is especially pertinent in ESG debates, as companies involved in environmental, social, and governance (ESG) controversies frequently encounter adverse responses from diverse stakeholder groups, potentially undermining financial performance through reputational harm and diminished investor trust [11].
Corporate governance moderates this link by shaping how corporations address stakeholder expectations and manage ESG risks. Robust governance frameworks—including an independent board and gender diversity—can assist organizations in alleviating the adverse impacts of ESG controversies by enhancing responsibility and responsiveness to stakeholder issues [12]. Weak governance systems increase the likelihood of corporations mismanaging ESG risks, resulting in financial instability. Nevertheless, companies with strong corporate governance can address ESG concerns more efficiently, maintaining stakeholder trust and reducing financial losses. This study, utilizing the stakeholder theory, highlights that financial performance is influenced not just by ESG controversies but also by the effectiveness of corporations in managing their stakeholder relationships. Companies with robust corporate governance frameworks are more skillful at managing ESG risks, underscoring the belief that governance is a critical determinant of whether ESG controversies result in financial deterioration or sustained resilience [13].

2.1.2. Resource-Based View Theory (RBVT)

The resource-based view theory (RBVT) offers a significant model for comprehending the connection between ESG controversies and financial performance, especially when corporate governance serves as a moderating variable. The resource-based view theory (RBVT), proposed by Barney [14], posits that a firm’s stable competitive advantage hinges on its capacity to acquire, encourage, and proficiently deploy valuable, rare, inimitable, and non-substitutable resources. In the context of ESG controversies, intangible assets such as business reputation, stakeholder trust, and sustainability-oriented innovation significantly influence the financial stability of firms [15].
When a firm encounters ESG controversies, these intangible assets may be compromised, resulting in financial impacts, including diminished investor confidence, falling stock prices, and regulatory penalties [16]. Firms with robust corporate governance frameworks can more effectively manage ESG-related risks by promoting openness, accountability, and ethical decision-making. Governance mechanisms—such as independent board supervision and board’s gender diversity—augment a firm’s capacity to use ESG activities as strategic assets, alleviating the financial effects of ESG controversies. This study demonstrates that organizations with strong governance frameworks are more adept at converting ESG issues into opportunities through the RBVT. By actively addressing ESG risks and incorporating sustainable practices into their operations, organizations can enhance their intangible assets and achieve superior financial performance [17]. Consequently, corporate governance functions as a strategic asset that mitigates the effects of ESG controversies, allowing firms to maintain their competitive edge and long-term profitability in the face of ESG-related issues.
The combined contributions of the stakeholder theory and the resource-based view theory (RBVT) provide a robust theoretical framework for comprehending corporate ESG performance, especially in the MENA region. The stakeholder theory underscores the necessity of meeting the expectations of many stakeholders by harmonizing corporate operations with societal and environmental concerns. The RBVT emphasizes the strategic importance of internal firm resources and competencies, positing that ESG activities, including environmental innovation and social responsibility, can function as valuable, uncommon, and inimitable resources that confer competitive advantages to organizations. Within the MENA context, characterized by rapidly evolving institutional environments and escalating stakeholder demands driven by global ESG trends and regulatory changes, this theoretical integration illustrates how firms can strategically utilize ESG initiatives to fulfill external expectations while developing internal capabilities that foster long-term sustainability and differentiation.

2.2. Previous Studies and Hypothesis Development

2.2.1. ESG Controversies and Firm Performance

The stakeholder theory suggests that corporations undertake corporate social responsibility (CSR) initiatives, as well as ESG practices, not solely to optimize shareholder wealth, but also to achieve wider social goals, reduce managerial opportunism, and improve their reputation [18,19]. Companies frequently use corporate social responsibility, especially environmental performance, to enhance their brand and reputation [20,21]. During periods of societal restrictions, ethical controversies, or activities resulting in social and environmental damage, corporations typically enhance information-sharing to alleviate adverse consequences [22,23].
Traditionally, corporate finance literature has mostly focused on shareholder value maximization as the exclusive purpose of a firm [24,25]. Nonetheless, the stakeholder theory has broadened this viewpoint by acknowledging that enterprises also address stakeholder interests, resulting in the development of CSR research [26,27]. Corporate social responsibility (CSR) has a profound history and has undergone substantial evolution in response to shifting societal demands [28]. From a corporate perspective, CSR disclosure involves disseminating information regarding operations, activities, and initiatives that affect the public and stakeholders, with CSR disclosure being crucial for establishing trust and enhancing corporate reputation [4].
Corporate social responsibility (CSR) initiatives include a range of behaviors designed to fulfill the expectations of multiple stakeholders, including environmental, societal, and shareholder interests [29,30,31]. The abbreviation ESG (environmental, social, and governance) has arisen to encapsulate the scope of CSR operations, representing the policies implemented by firms to fulfill environmental and societal goals and therefore satisfy stakeholder requirements [32,33]. The resource-based view theory suggests that environmental and social initiatives can provide competitive advantages by refining distinctive skills and capabilities within an organization [34,35].
The relationship between ESG policies and financial performance is complicated. Research has produced inconclusive results, with certain studies indicating positive, negative, or ambiguous connections between ESG practices and financial performance [36]. Several circumstances affect the interaction among these variables. Customer uncertainty regarding CSR initiatives can undermine the usefulness of these strategies [37,38], prompting some to contend that ESG practices are merely expenditures that fail to yield significant benefits, potentially diminishing corporate performance [39]. In contrast, Porter and Kramer [40] highlight the advantageous effects of sustainable practices on financial performance, noting benefits such as diminished operational risks, enhanced contract negotiations, and improved reputation [41].
A company’s reputation is a recognized determinant of enhanced financial performance [42]. A favorable reputation promotes consumer loyalty, leading to long-term value. Conversely, stakeholders’ opinions about a corporation can differ, resulting in either favorable outcomes or unfavorable complications for the firm [43]. Adverse perceptions may result in diminished revenue, heightened financial risks, and elevated debt expenses. Responses from stakeholders to business crises can impact various groups in distinct ways [44]. Such events can stain a firm’s image and reputation, resulting in legal and financial consequences, particularly for publicly traded corporations where the market may overreact [45]. Based on these arguments, we propose the following hypothesis:
H1: 
There is a negative relationship between ESG controversies and performance.

2.2.2. Role of Board Characteristics as a Moderator

Corporate governance significantly moderates the relationship between ESG controversies and corporate performance by shaping firms’ risk management, transparency, and responsiveness to stakeholder concerns [46]. Effective governance frameworks—comprising board size, board independence, and board meetings—can alleviate the adverse financial impacts of ESG controversies by promoting responsibility and anticipatory decision-making [47]. Companies with ESG-related challenges are more expert at endorsing corrective actions, reinstating stakeholder confidence, and mitigating reputational and financial harm when they possess robust corporate governance [31]. In contrast, inadequate governance frameworks may intensify the negative repercussions of ESG scandals, resulting in heightened regulatory oversight, diminished investor trust, and deteriorating corporate performance. Corporate governance serves as a stabilizing mechanism that improves a company’s capacity to manage ESG risks while ensuring financial sustainability and long-term value creation [48].

2.2.3. Board Independence Moderating the Connection Between ESG Controversies and Performance

The structure of corporate boards and their impact on organizational decisions and performance is extensively researched in contemporary corporate finance [49]. Despite extensive research, especially about U.S. firms, data demonstrating a robust correlation between board composition and firm performance remain vague [50,51]. The lack of a conclusive fundamental relationship corresponds with the idea that internal governance mechanisms, such as board structure, are determined endogenously and adjust to the firms’ contracting and operational contexts [52,53]. Conversely, numerous countries have enacted laws requiring a minimum representation of independent directors on the boards of publicly traded corporations [54]. This regulatory change has resulted in a significant increase in the number of independent directors. This tendency is predicated on the premise that independent directors can improve the quality of board oversight, thereby increasing the firm’s value [55,56].
Independent directors on boards function as a governance mechanism capable of impacting ESG performance, mainly by enhancing transparency and oversight [57]. Independent directors are more inclined to synchronize their managerial interests with those of shareholders [58]. Prior research highlights the beneficial influence of independent board members in advancing effective ESG strategy. Beji et al. [59] argued against the idea that including independent directors on boards is positively associated with ESG success. One reasonable explanation is that independent directors depend on publicly accessible information, such as financial reports, due to their absence of insider knowledge. As a result, they are more inclined to support ESG disclosure [60]. Furthermore, due to the intimate association between their reputation and that of the firm, independent directors may advocate for significant ESG activities to elevate their status [59]. Based on these arguments, we propose the following hypothesis:
H2: 
The relationship between ESG controversies and performance is moderated by board independence.

2.2.4. Board’s Gender Diversity Moderating the Connection Between ESG Controversies and Performance

In corporate finance, the inclusion of female board members is regarded as a governance mechanism that can affect agency conflicts. Gender diversity on boards is seen to improve governance and diminish agency costs in an agency-driven context [61,62]. Furthermore, the resource dependence theory asserts that women provide significant resources, including skills, expertise, and experience, to boards [63]. Ward & Forker [64] contend that the presence of women on corporate boards enhances resource utilization, which is essential for maneuvering complex ESG environments.
The inclusion of women on boards has been demonstrated to enhance corporate social responsibility (CSR) and environmental, social, and governance (ESG) performance [65]. Research demonstrates that gender-diverse boards augment the credibility of ESG reporting and convey a robust commitment to stakeholders [59,66]. Recent studies clarify the mediating function of temporal orientation in the association between the board’s gender diversity and ESG performance, indicating that gender diversity positively affects the sustainable growth rate, particularly in family-owned enterprises [51,67]. Nekhili et al. [68] provided evidence that including women on boards enhances the legitimacy of CSR reporting and increases market value, demonstrating a strong commitment to stakeholder interests. Furthermore, the presence of women on boards has been associated with decreased environmental litigation and improved ethical standards within organizations [9]. Female directors frequently prioritize business legitimacy and ethical policies, particularly the elimination of harmful labor abuses [69]. Eliwa et al. [70] discovered that gender diversity on corporate boards significantly influences ESG detachment across diverse cultural and religious contexts, underscoring its relevance in corporate ethical standards.
Moreover, the inclusion of women on boards has been associated with a decrease in environmental litigation [69]. Female directors are more inclined to prioritize the firm’s legitimacy and eliminate illegal labor practices, such as child labor [59]. Recent research, such as that conducted by Amin et al. [51], highlights the beneficial impact of gender diversity in corporate boards on sustainable growth rates, particularly within family-owned businesses. This study highlights the complex role of female directors in improving corporate governance and ethical standards, especially in alleviating the adverse effects of ESG controversies.
We assert that the presence of women on the boards of corporations engaged in disputed operations is positively perceived by investors since it reduces the possible damage to the firm’s value. Consequently, we propose the following hypothesis:
H3: 
The relationship between ESG controversies and performance is moderated by the board’s gender diversity.

3. Methodology

3.1. Sample

The sample collected data for all non-financial enterprises across ten MENA nations between 2010 and 2023. We collected the data using Refinitiv Eikon Platform (LSEG). Furthermore, any missing data were obtained from the annual reports, when accessible; otherwise, they were sourced from the related stock exchanges. All data pertaining to financial companies were omitted due to the distinct form of financial statements and the unique nature of factors influencing the necessary disclosures. Table 1 outlines the specifics of the sampling process employed in this empirical study.

3.2. Model Development

The following variables were applied to examine the impact of ESG controversies on the performance of enterprises listed in the MENA region, considering critical financial and governance factors. The dependent variable was return on assets (ROA), while the independent variable was ESG controversies, with corporate governance moderated by the board’s gender diversity and board independence. Additionally, we accounted for company characteristics, including company size and leverage, as well as macroeconomic variables such as GDP and inflation rate.

3.2.1. Dependent Variable

The return on assets (ROA) is a reliable indicator of a firm’s performance because it evaluates how efficiently it uses its assets to generate profits [71]. The return on assets (ROA) is determined by dividing the net income by the total assets, offering a clear measure of a company’s efficiency in transforming investments into profits [72]. A primary advantage of the ROA is its capacity to indicate both profitability and operational efficiency. In contrast to market-based metrics such as stock returns, which may be swayed by external influences such as investor mood and macroeconomic conditions, the ROA emphasizes a company’s internal performance by evaluating the effectiveness of management in resource allocation [73]. A high ROA signifies that a corporation is competently employing its assets to produce cash, whereas a diminished ROA may imply inefficiency or suboptimal asset utilization [74]. Moreover, this indicator is frequently utilized in ESG research, as it assesses whether firms with robust governance and sustainable practices attain superior financial results despite possible controversies [75]. By associating ESG elements with financial performance, the ROA offers a thorough and concrete assessment of a firm’s operational effectiveness, rendering it an appropriate metric for evaluating the influence of ESG controversies on corporate performance.

3.2.2. Independent Variable

ESG controversies pertain to incidents where a company’s activities adversely affect its environmental (E), social (S), or governance (G) obligations, resulting in reputational, legal, and financial repercussions [42]. Controversies may stem from environmental infractions (including pollution, deforestation, or carbon emissions); social concerns (such as labor rights violations, workplace discrimination, or unethical supply chain practices); and governance deficiencies (such as fraud, corruption, or insufficient board independence) [45]. ESG controversies frequently lead to regulatory penalties, erosion of stakeholder trust, and diminished investor confidence, all of which can directly impact a firm’s financial performance [76]. Companies that disregard ESG controversies jeopardize their brand and competitive standing in the long run, but those with robust corporate governance can alleviate adverse effects through improved transparency, ethical leadership, and responsible business practices [46].

3.2.3. Moderating Variables (Board Characteristics)

Board independence significantly moderates the association between ESG scandals and corporate performance by improving supervision, accountability, and strategic decision-making [77]. Independent board members, unaffiliated with the firm’s management, offer an impartial viewpoint and assist in ensuring that corporate actions are consistent with the interests of shareholders and stakeholders [49]. In the event of ESG controversies—such as environmental violations, governance scandals, or unethical labor practices—an independent board can serve as a risk mitigation mechanism by ensuring transparency, holding executives accountable, and enacting corrective measures to restore investor and public confidence [78]. Companies with a significant level of board independence are more adept at managing ESG risks, thus reducing financial losses and reputational harm [79]. In contrast, firms with limited board independence may find it challenging to address ESG concerns, resulting in sustained adverse effects on financial performance [54]. Enhancing corporate governance through board independence enables organizations to address ESG concerns more efficiently, mitigate the impact of ESG scandals on company performance, and foster long-term financial resilience [80].
Board’s gender diversity significantly moderates the association between ESG scandals and corporate success, as diverse boards contribute diversified viewpoints, enhanced decision-making, and superior risk management [81]. An increased representation of women on corporate boards correlates with more ethical monitoring, improved stakeholder response, and a heightened commitment to sustainability, potentially alleviating the adverse effects of ESG scandals [82]. Female directors are frequently linked to improved corporate governance procedures, resulting in more accountable company plans and proactive crisis management in response to ESG-related challenges [46]. Diverse boards enhance openness and accountability, mitigating reputational risks and bolstering investor trust, especially amidst ESG problems. By regulating this link, board gender diversity might assist organizations in addressing ESG concerns more efficiently, enhancing their financial performance despite external pressures [62].

3.2.4. Control Variables (Firm’s Characteristics)

The size of a firm affects the company’s capacity to withstand financial shocks, mitigate reputational risks, and execute sustainability goals [83]. Large corporations generally possess superior resources, diverse activities, and enhanced market power, enabling them to more effectively alleviate the financial repercussions of ESG controversies compared to smaller enterprises. Larger organizations frequently face heightened regulatory scrutiny and stakeholder expectations, forcing them to implement more stringent ESG procedures [84]. In contrast, smaller enterprises may lack the financial robustness and institutional structures necessary to effectively address ESG challenges, which could result in more significant financial repercussions [85]. By adjusting for firm size, such analyses may determine the direct effect of ESG controversies on financial performance, guaranteeing that differences in company size do not skew the analysis results. Firm size is generally measured by the natural logarithm of the total assets, as it provides a more standardized and consistent metric across organizations with differing scales [86].
Leverage, defined as the ratio of a company’s total debt to its total assets, is an essential control variable in assessing the influence of ESG controversies on corporate performance [80]. Companies with elevated leverage encounter more financial risk owing to their commitments to creditors, which can exacerbate the adverse effects of ESG problems [87]. Highly leveraged companies may face intensified scrutiny from investors and lenders, resulting in elevated borrowing costs or diminished access to capital if they become involved in ESG-related controversies. Conversely, companies with reduced leverage may possess enhanced financial flexibility to address ESG concerns, execute remedial measures, and sustain consistent performance amid reputational adversities [88]. By accounting for leverage, researchers may guarantee that fluctuations in financial risk and debt composition do not obscure the observed correlation between ESG controversies and financial performance, resulting in more precise and dependable outcomes [62].

3.2.5. Control Variables (Macroeconomic Variables)

Inflation impacts firms’ operating expenses, consumer purchasing capacity, and overall economic stability [89]. High inflation can result in increased input expenses, labor pressures, and decreased consumer demand, potentially exacerbating the financial ramifications of ESG problems. Companies encountering ESG issues during high inflation may find it challenging to recuperate due to rising expenses and diminished investor confidence [49]. Conversely, during periods of low inflation, companies may enjoy enhanced financial flexibility to address ESG issues without substantially compromising their profitability [90]. By adjusting for inflation, researchers can ascertain if variations in corporate performance stem from ESG controversies or overarching macroeconomic factors, thus facilitating a more accurate evaluation of the link [91].
The gross domestic product (GDP) captures the overarching economic context in which businesses function. An increasing GDP signifies economic growth, elevated consumer expenditures, and augmented business investments, which can assist companies in alleviating the adverse financial impacts of ESG concerns [72]. In contrast, during economic recessions, companies with ESG challenges may suffer increased financial distress, diminished investor confidence, and decreased revenues, intensifying the adverse effects of controversies on performance [92]. Moreover, in high-GDP economies, regulatory frameworks and corporate governance structures are likely more advanced, affecting corporations’ responses to ESG issues. By adjusting for the GDP, researchers can discern the impact of ESG controversies on corporate performance, guaranteeing that noted fluctuations are not merely influenced by overarching economic circumstances [93]. The following Table 2 provides the measurements of all the variables included in the three models.

3.3. Model

The following regression models were used to investigate the impact of the moderating role of board characteristics on the relationship between ESG controversies and the firm’s profitability. We considered the effects of firm’s characteristics such as firm size and leverage, as well as macroeconomic variables such as GDP and inflation.
ROAi,t = α0 + α1 ROAi,t−1 + α2 ESGCi,t + α3 Bindi,t + α4 BGDi,t + α5 FSizei,t + α6 Levi,t + α7 Inft + α8 GDPt + e
ROAi,t = α0 + α1 ROAi,t−1 + α2 ESGCi,t + α3 Bindi,t + α4 BGDi,t + α5 ESGCi,t × Bindi,t + α6 FSizei,t + α7 Levi,t + α8 Inft + α9 GDPt + e
ROAi,t = α0 + α1 ROAi,t−1 + α2 ESGCi,t + α3 Bindi,t + α4 BGDi,t + α5 ESGCi,t × BGDi,t + α6 FSizei,t + α7 Levi,t + α8 Inft + α9 GDPt + e
where
  • ROA is the return on assets (profitability measure) measured by dividing the net income by the total assets,
  • ESGC is the ESG controversy score,
  • Bind is the board independence measured by the percentage of independent board members,
  • BGD is the board’s gender diversity measured by the percentage of females on the board,
  • FSize is the firm size measured by the natural logarithm of the total assets,
  • Lev is the leverage measured by the ratio of the total debt to the total assets,
  • Inf is the inflation rate measured by the change in the consumer price index, and
  • GDP is the gross domestic product measured by the growth in the GDP.

4. Results and Analysis

4.1. Descriptive Statistics

The following Table 3 presents the data for the MENA non-financial companies from 2010 to 2023 for all the selected variables. We collected all the variables using Refinitiv Eikon Platform (LSEG). The descriptive data offer essential insights into the attributes of non-financial enterprises in the MENA region, namely concerning their financial performance, ESG controversies, and corporate governance frameworks.
The average return on assets (ROA) of 19.1% indicates that, on average, enterprises in the sample yield a robust return on their assets, reflecting overall profitability and effective resource utilization. The variations in the ROA among organizations amount to 0.062, which indicates disparities in industry dynamics, financial strategies, and governance structures. Secondly, the average ESG controversy score of 75.4 signifies a relatively high level of ESG challenges encountered by organizations. This indicates that numerous companies encounter difficulties associated with environmental, social, or governance issues, potentially affecting their reputation, investor trust, and overall financial success. An elevated ESG controversy score may signify an increased risk exposure, necessitating corporations to enhance governance structures to alleviate potential adverse impacts. In addition, the average board independence of 42% indicates that independent directors constitute less than half of the board’s composition. This may suggest a moderate degree of external scrutiny potentially impacting decision-making and risk management, especially with regard to ESG issues. Ultimately, the average board’s gender diversity of 25.7% indicates that women occupy around one-fourth of board positions on average. This signifies advancement in gender diversity, although it also underscores the opportunity for enhanced inclusivity and diversity within corporate leadership frameworks. Furthermore, the standard deviation of firm size (1.242) underscores the heterogeneity in company sizes within the sample. This indicates that although several firms are markedly larger or smaller than the average, there exists substantial dispersion, illustrating the varied character of enterprises in the MENA region.

4.2. Correlation Matrix

The following Table 4 provides the correlation between the selected variables. The correlation matrix offers significant insights into the relationship between business performance and essential financial, governance, and macroeconomic variables for non-financial firms in the MENA region.
The inverse link between ESG issues and company performance indicates that firms with greater ESG controversies typically exhibit diminished financial performance. This indicates that ESG concerns, such as environmental infractions, governance shortcomings, or social wrongdoing, can tarnish a company’s brand, diminish investor trust, and result in financial penalties, all of which adversely impact profitability and overall firm value. Likewise, leverage exhibits a negative correlation with company performance, suggesting that companies with elevated debt levels generally experience diminished financial returns. Elevated leverage amplifies financial risk and interest commitments, potentially undermining profitability, particularly in times of economic instability. Furthermore, excessive debt may constrain a firm’s capacity to engage in growth opportunities and address ESG problems effectively. On the other hand, firm performance positively correlates with board independence and gender diversity, suggesting that improved corporate governance enhances financial results. An independent board is likely to enhance monitoring, strategic decision-making, and risk management, thereby mitigating the adverse effects of ESG controversies. Similarly, enhanced gender diversity on boards can result in superior decision-making, increased innovation, and heightened responsiveness to stakeholder issues, perhaps leading to improved financial performance. Moreover, firm size has a positive correlation with performance, indicating that larger organizations generally achieve superior outcomes. Large corporations frequently gain advantages from economies of scale, enhanced market power, and superior access to financial and human resources, enabling them to manage ESG risks more proficiently. At the macroeconomic level, inflation and the GDP demonstrate a positive link with corporate success, suggesting that corporations generally thrive in robust economic conditions. An increasing GDP indicates heightened consumer demand and potential for corporate expansion, yet moderate inflation can enhance profitability by enabling enterprises to adjust pricing and sustain stable margins.

4.3. Panel GMM Regression Results

Table 5 presents the outcomes of the panel GMM regression for the three models, incorporating the moderation of board characteristics in the MENA region. The application of panel GMM regression has several advantages. Panel GMM effectively addresses endogeneity concerns commonly encountered in ESG research, such as omitted variable bias, simultaneity, and measurement errors. Employing lagged values as instruments ensures that the estimated relationship between ESG controversies and profitability is unbiased and stable. Moreover, given that business performance and ESG practices evolve, panel GMM is optimally designed for dynamic models, accurately capturing the enduring impact of governance on the ESG controversies–profitability nexus. This method also accounts for unobserved firm-specific variability, guaranteeing that governance systems are sufficiently integrated into the analysis.
In the three models, the lagged return on assets positively and significantly influences current profitability, indicating that a firm’s historical financial performance is essential in determining its present and future profitability. This outcome corresponds with the concept that financially robust and high-performing companies generally maintain their success over time by capitalizing on retained earnings, operational savings, and strategic reinvestments [82]. Based on the resource-based view theory (RBVT), enterprises with robust historical profitability can leverage their amassed resources [62].
Furthermore, research reveals that ESG controversies significantly and adversely impact company performance in the MENA region. This indicates that companies encountering environmental, social, or governance-related challenges suffer reductions in profitability, market value, or operational efficiency [81]. This outcome corresponds with the stakeholder theory, which asserts that companies engaging in unethical or irresponsible behaviors jeopardize investor confidence, fade their brand, and incur regulatory penalties, all of which can adversely impact financial performance [76]. In the MENA region, ESG factors are gaining significance among investors, especially among institutional and international entities. Companies involved in ESG controversies—such as environmental infractions, labor rights violations, or governance scandals—may experience diminished stock prices, decreased investment, and heightened capital costs. This supports the risk mitigation argument, wherein markets penalize companies that inadequately manage ESG issues [85].
Additionally, the results indicate that board independence significantly and positively affects performance in the MENA region. Board independence is essential for improving business performance by facilitating effective oversight and mitigating agency conflicts [56]. Independent board members, lacking direct connections to the firm’s management, facilitate impartial decision-making, reduce managerial opportunism, and improve transparency [109]. This oversight mitigates the danger of financial mismanagement and guarantees that business plans are congruent with shareholder interests. In the MENA region, where numerous enterprises exhibit concentrated ownership structures, independent directors facilitate a balance of power between dominant shareholders and minority investors, thus promoting equitable governance practices [78]. In certain instances, independent directors may have restricted power owing to established informal networks and political affiliations, thereby undermining their intended governance role [80].
Moreover, the results suggest that there is a significant positive impact of the board’s gender diversity on the performance of companies in the MENA region. On corporate boards, gender diversity favorably influences firms’ performance by improving the decision-making quality, risk management, and stakeholder engagement [110]. A diverse board offers a range of opinions, resulting in more equitable conversations, ethical deliberations, and enhanced corporate governance [54]. Women on boards are frequently linked to improved corporate social responsibility (CSR) practices and elevated reputational status, which can draw responsible investors and bolster ties with essential stakeholders. In the MENA region, cultural and institutional obstacles continue to limit the full impact of gender diversity, despite certain governments implementing steps to enhance female board representation [111]. In family-owned and state-controlled firms, female directors may encounter difficulties in exercising significant influence, notwithstanding their appointment to governance roles. As global investor expectations and regulatory demands increase, organizations with more diversified leadership structures may gain a competitive edge in financial markets [81].
The results demonstrate that corporate governance measures, particularly board independence and gender diversity, significantly influence the connection between ESG controversies and company performance. This indicates that robust governance systems can alleviate the adverse impacts of ESG controversies [71]. In the MENA region, concentrated ownership and governmental participation frequently shape governance frameworks, highlighting the increasing need for independent supervision and diverse leadership to address ESG concerns [59]. The degree to which corporate governance effectively influences this relationship is contingent upon several institutional, cultural, and legal elements [66]. More specifically, board independence functions as an essential governance instrument that improves accountability and guarantees that management adequately manages ESG risks. In the event of ESG controversies, independent boards can significantly contribute to the implementation of corrective measures, stakeholder engagement, and the mitigation of reputational harm [57]. Their capacity to contest management decisions mitigates the risk of additional financial decline and enhances investor trust [112]. Furthermore, the board’s gender diversity serves as an additional corporate governance instrument that can mitigate the adverse effects of ESG controversies on business performance. Female directors frequently introduce varied viewpoints, ethical considerations, and an increased awareness of sustainability and stakeholder issues. Studies indicate that gender-diverse boards are more inclined to adopt responsible business practices, bolster risk management, and advance corporate social responsibility (CSR) activities, hence enabling corporations to address ESG controversies more adeptly [46].
Furthermore, the findings demonstrate a substantial positive association between company size and performance, as well as a significant negative relationship between leverage and performance. The relationship between firm size and performance indicates that larger firms generally achieve superior financial results relative to smaller firms. This can be attributed to multiple variables, chiefly economies of scale, which enable larger enterprises to diminish operational costs and enhance efficiency [113]. Large enterprises can secure more favorable agreements with suppliers, distribute fixed costs across a broader revenue base, and improve productivity through sophisticated technology and resource management [114]. Their robust market positioning affords them enhanced pricing power and a competitive edge, facilitating the generation of elevated profit margins [85]. On the other hand, the inverse association between leverage and the firm’s performance suggests that increased debt levels may adversely affect performance. A key cause for this is the financial strain linked to high leverage, as companies with increased debt exposure must dedicate a substantial amount of their earnings to interest payments [33]. This diminishes their net profitability and constrains the resources allocated for strategic expenditures and innovation. If companies do not produce adequate returns to meet their debt obligations, they may encounter financial difficulties, heightening the risk of default and bankruptcy [48].
The insignificant outcomes of the AR (1), AR (2), and Hansen test in the GMM regression suggest that the model’s assumptions are valid and the estimation is dependable. The AR (1) test generally indicates first-order autocorrelation in the differenced residuals. The AR (2) test evaluates second-order autocorrelation, and an insignificant AR (2) outcome indicates the absence of problematic autocorrelation in the error terms, which affirms the model’s validity. The Hansen test evaluates the overall validity of the instruments included in GMM estimation; an insignificant Hansen test signifies that the instruments are valid and uncorrelated with the error term, indicating that the model is not over-identified. Collectively, these insignificant test results convey confidence that the GMM regression outcomes are consistent, and the instruments are suitable, thus reinforcing the robustness of the predicted coefficients.

5. Robustness of the Results

The following Table 6 provides the results of the panel GMM regression for the three models used to investigate the relationship between ESG controversies and the performance of companies in the MENA region. Different proxies were used to assess the robustness of the results.
Table 6 uses various metrics for the included variables to evaluate the robustness of the results, guaranteeing that the conclusions are not contingent upon definitions. Company success is represented by the return on equity (ROE), offering a comprehensive view of financial results. Likewise, leverage was assessed through the debt-to-equity ratio, providing a more thorough understanding of a firm’s financial structure. Furthermore, the board’s gender diversity was evaluated based on the absolute number of female members, rather than a percentage metric, providing a clear depiction of gender involvement in decision-making. Similarly, board independence was quantified by the number of independent board members, providing a more nuanced representation of governance frameworks. The natural logarithm of market capitalization, a commonly used transformation to reduce skewness and enhance comparability, ultimately quantifies firm size. These alternate measurements augment the study’s robustness, bolstering the dependability and consistency of the results across various specifications. Based on the previous findings, our study results remain valid when applying the panel GMM regression.

6. Conclusions, Implications, and Limitations

This paper investigated the impact of board characteristics on the relationship between ESG controversies and firms’ performance in the MENA region. The sample included all the non-financial companies in ten countries in the Middle East and North Africa. The period of study covered 14 years, from 2010 to 2023. We gathered data from Refinitiv Eikon Platform (LSEG). The missing data were collected either from the annual reports, if available, or from the relevant stock exchange when annual reports were not accessible. We used panel GMM regression to estimate the relationship. The dependent variable was the return on assets. The independent variable was ESG controversies, and the moderating variables were board independence and the board’s gender diversity, representing the board characteristics. Firm size and leverage served as variables for firm’s characteristics, and inflation and GDP served as macroeconomic variables.
The findings demonstrate that ESG controversies adversely affect company performance in the MENA region, indicating that companies encountering environmental, social, or governance-related challenges suffer diminished profitability. In contrast, corporate governance practices, including board independence and gender diversity, demonstrate a substantial beneficial effect on performance, emphasizing the value of robust governance frameworks in improving financial results. Moreover, the analysis of corporate governance’s moderating role reveals that both board independence and gender diversity substantially diminish the adverse effects of ESG controversies on firm performance, indicating that well-governed firms are more adept at mitigating risks linked to ESG-related controversies. Regarding firm-specific characteristics, firm size exhibits a substantial positive correlation with performance, reinforcing the notion that larger firms benefit from advantages such as economies of scale, enhanced market positioning, and improved access to financing. Conversely, leverage adversely affects performance, indicating that excessive debt constrains organizations’ financial flexibility and profitability.
The results of this study have profound implications for managers, investors, and regulators in the MENA region. The detrimental effect of ESG scandals on corporate performance highlights the necessity for managers to engage in proactive ESG risk management. Companies must establish robust internal controls, transparent reporting systems, and ethical business practices to alleviate the financial repercussions of ESG-related concerns. Furthermore, the beneficial impact of corporate governance, especially board independence and gender diversity, indicates that managers ought to diversify board composition and reinforce independent scrutiny to improve decision-making and foster long-term value development.
The results demonstrate the value of integrating ESG considerations and the quality of corporate governance into investment decisions for investors. Investors must acknowledge that companies with robust governance frameworks exhibit greater resilience to ESG controversies, thereby mitigating investment risks and increasing financial returns. Portfolio strategies must consider governance quality as a mitigating factor for ESG risks, especially in emerging markets such as the MENA region. Regulators ought to consider these findings when developing corporate governance and ESG disclosure policies. Considering the moderating influence of governance in mitigating the adverse impacts of ESG controversies, regulators ought to enhance board independence mandates, advocate for gender diversity programs, and implement more stringent ESG reporting standards. By doing so, they can enhance market transparency and guarantee that corporations are accountable for ESG risks, eventually fostering a more sustainable and stable financial system. Furthermore, regulators ought to formulate policies that enhance ESG integration and optimal corporate governance standards, considering regional market characteristics. Policies ought to encourage companies to uphold separate boards with distinct oversight duties. Furthermore, authorities ought to prioritize enhancing board meeting efficacy instead of imposing requirements for increased meeting frequency. Customizing governance frameworks for each market is necessary to ensure that legislation supports effective decision-making mechanisms in the GCC. Ultimately, governance rules should enhance the beneficial moderating effect of corporate governance on the relationship between ESG performance and financial outcomes, ensuring that sustainability initiatives yield robust financial results for companies and countries.
Despite its contributions, this study has several drawbacks. The study exclusively examined non-financial enterprises in the MENA region, hence constraining the applicability of the findings to financial institutions or firms in different geographical contexts. Subsequent research may broaden the analysis to encompass financial institutions or cross-regional comparisons to evaluate the consistency of the identified associations across varying economic and regulatory contexts. Secondly, the study depended on secondary data sources, which may have constraints in precisely reflecting enterprises’ ESG controversies and governance processes. Future studies may include primary data-gathering techniques, such as surveys or interviews with corporate leaders, to obtain comprehensive insights into the internal management of ESG risks and governance frameworks within firms. Third, although the study investigates corporate governance as a moderating variable, subsequent research could consider additional moderators or mediators, such as institutional ownership, CEO attributes, or industry-specific elements, to help clarify the mechanisms affecting the ESG controversies–performance relationship.

Author Contributions

Conceptualization, B.A.K., M.S.A. and M.S.A.-N.; Methodology, B.A.K., M.S.A. and M.S.A.-N.; Software, M.S.A.-N.; Validation, M.S.A.; Formal analysis, B.A.K. and M.S.A.-N.; Investigation, B.A.K.; Resources, M.S.A. and M.S.A.-N.; Data curation, M.S.A.-N.; Writing—original draft, B.A.K. and M.S.A.; Writing—review & editing, B.A.K.; Project administration, B.A.K.; Funding acquisition, M.S.A. All authors have read and agreed to the published version of the manuscript.

Funding

This work was supported and funded by the Deanship of Scientific Research at Imam Mohammad Ibn Saud Islamic University (IMSIU) (grant number IMSIU-DDRSP2502).

Institutional Review Board Statement

This article does not contain any studies with human participants performed by any of the authors. The study does not involve human participants; therefore, ethics approval was not required.

Informed Consent Statement

This article does not contain any studies with human participants performed by any of the authors.

Data Availability Statement

The data that support the findings of this study are available from Refinitiv Eikon Platform (LSEG), but restrictions apply to the availability of these data, as they were used under subscription for the current study and are therefore not publicly available. The data are, however, available from the authors upon reasonable request and with the permission of LSEG.

Conflicts of Interest

The authors declare no conflict of interest.

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Table 1. Sampling procedure.
Table 1. Sampling procedure.
Sampling ProcedureDescriptionTotal PopulationSample Size
1.All listed non-financial companies in 10 MENA countries1032-
2.Data availability consideration-461
3.Selection of non-financial companies with data-461
4.Period covered -2010–2023
CountryPopulationFinal sample
Middle East
Qatar3412
United Arab Emirates8543
Saudi Arabia 312151
Bahrain208
Kuwait8937
Oman7839
Jordan12853
North Africa
Egypt17768
Tunisia5122
Morocco5828
Total1032461
Authors’ analysis
Table 2. Summary of variable measurements.
Table 2. Summary of variable measurements.
VariableAbbreviationMeasurementReferences Source
Dependent variable
Return on assetsROANet income divided by total assets[94,95]Refinitiv
Independent variable
ESG controversiesESGCESG Controversies Score[96,97]Refinitiv
Moderator variables
Board independenceBindPercentage of independent directors on the board[98,99]Refinitiv
Board’s gender diversityBGDPercentage of females on the board of directors[100,101]Refinitiv
Control variables (firm’s characteristics)
Firm sizeFSizeNatural Log of Total Assets[102,103]Refinitiv
LeverageLevRatio of Total Debt to total Assets [71,104]Refinitiv
Control variables (macroeconomic variables)
GDPGDPThe growth in the annual GDP [105,106]World Bank Open Data
InflationInfThe change in the annual CPI [107,108]World Bank Open Data
Authors’ analysis
Table 3. Descriptive statistics.
Table 3. Descriptive statistics.
ROAESGCBindBGDLevFSizeInfGDP
Mean0.19175.400.4200.2570.72419.9890.0180.037
St. Dev.0.0628.560.1700.0540.0821.2420.0150.044
Min.−0.75232.43000.01514.512−0.028−0.059
Max.1.89010010.7500.97524.9560.0620.186
Table 4. Correlation matrix.
Table 4. Correlation matrix.
(1)(2)(3)(4)(5)(6)(7)(8)
(1) ROA1
(2) ESGC−0.1621
(3) Bind0.0850.1301
(4) BGD0.063−0.059−0.0751
(5) FSize0.048−0.078−0.019−0.0071
(6) Lev−0.189−0.0390.0330.0470.0251
(7) Inf0.0150.1880.174−0.0280.037−0.1481
(8) GDP0.0320.0260.0090.017−0.034−0.017−0.0221
Table 5. Panel GMM regression results.
Table 5. Panel GMM regression results.
Dependent Variable: Return on Assets
Model 1Model 2Model 3
Lag ROA0.031 ***0.039 ***0.026 ***
ESGC−0.045 ***−0.056 ***−0.039 ***
Bind0.029 **0.038 **0.043 **
BGD0.049 **0.042 **0.037 **
ESGC × Bind 0.057 ***
ESGC × BGD 0.040 **
FSize0.125 ***0.096 ***0.132 ***
Lev−0.05 9 *−0.044 **−0.029 *
Inf0.1840.2080.193
GDP0.2150.2690.207
Constant0.362 ***0.448 **0.344 **
Hansen test 0.2200.2640.192
AR (1)0.1960.1820.211
AR (2)0.2100.2410.362
Wald chi-squared test635.959
(0.000)		725.262
(0.000)		603.118
(0.000)
***, **, * are the statistical significance levels at 0.01, 0.05 and 0.10 respectively.
Table 6. Robustness of Results (Panel GMM regression results).
Table 6. Robustness of Results (Panel GMM regression results).
Dependent Variable: Return on Equity
Model 1Model 2Model 3
Lag ROE0.062 ***0.085 ***0.074 ***
ESGC−0.072 ***−0.064 ***−0.089 ***
Bind0.055 **0.049 **0.068 **
BGD0.081 **0.078 **0.099 **
ESGC × Bind 0.060 ***
ESGC × BGD 0.047 **
FSize0.162 ***0.124 ***0.131 ***
Lev−0.068 *−0.047 **−0.070 *
Inf0.2520.2630.316
GDP0.2440.2990.214
Constant0.362 ***0.242 **0.185 **
Hansen test 0.3660.2850.210
AR (1)0.4150.4630.374
AR (2)0.4890.4740.409
Wald chi-squared test956.421
(0.000)		857.659
(0.000)		963.475
(0.000)
***, **, * are the statistical significance levels at 0.01, 0.05 and 0.10 respectively.
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Abu Khalaf, B.; Alqahtani, M.S.; Al-Naimi, M.S. ESG Controversies and the Financial Performance of MENA Firms: The Moderating Role of Board Characteristics. Sustainability 2025, 17, 5055. https://doi.org/10.3390/su17115055

AMA Style

Abu Khalaf B, Alqahtani MS, Al-Naimi MS. ESG Controversies and the Financial Performance of MENA Firms: The Moderating Role of Board Characteristics. Sustainability. 2025; 17(11):5055. https://doi.org/10.3390/su17115055

Chicago/Turabian Style

Abu Khalaf, Bashar, Munirah Sarhan Alqahtani, and Maryam Saad Al-Naimi. 2025. "ESG Controversies and the Financial Performance of MENA Firms: The Moderating Role of Board Characteristics" Sustainability 17, no. 11: 5055. https://doi.org/10.3390/su17115055

APA Style

Abu Khalaf, B., Alqahtani, M. S., & Al-Naimi, M. S. (2025). ESG Controversies and the Financial Performance of MENA Firms: The Moderating Role of Board Characteristics. Sustainability, 17(11), 5055. https://doi.org/10.3390/su17115055

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