Does Profitability Support Sustainability? Examining the Influence of Financial Performance and ESG Controversies on ESG Ratings

Abstract

This study explores the relationship between corporate financial performance and ESG, reporting performance across all three ESG pillars: Environmental, Social, and Governance. We used a robust panel dataset of over 28,274 firm-year observations from listed companies worldwide (covering 2019–2023), combining financial metrics and ESG performance scores from the Refinitiv database. Panel regression results indicate that more profitable firms (measured by Net Income and Return on Assets (ROA)) exhibit statistically significant higher ESG performance across all three pillars, reinforcing the view that financial strength supports more comprehensive sustainability efforts. By contrast, firms with more ESG controversies attain significantly lower ESG scores, suggesting that incidents of misconduct or governance failures undermine sustainability reporting credibility. These findings contribute to the literature by empirically validating the dual role of financial success and reputational risk in shaping ESG performance. This study also offers practical insights for regulators, investors, and corporate managers. Strong profitability can facilitate improved ESG transparency, whereas proactive measures and stricter oversight are needed to address controversies, enhance accountability, and mitigate greenwashing.

1. Introduction

Environmental, Social, and Governance (ESG) factors have become central in shaping corporate behavior, investment decisions, and policy development [1]. ESG concerns are no longer peripheral—they are now embedded in financial markets, regulatory requirements, and societal expectations [2]. Investors increasingly demand transparency not only in financial performance but also in how firms manage their environmental impact, social responsibility, and governance practices. As a result, ESG reporting has evolved from voluntary practices to near-standard expectations for listed companies worldwide [3].

This transformation has been accelerated by the growing awareness that sustainability and profitability are not mutually exclusive. A significant body of literature suggests that companies adopting strong ESG strategies tend to outperform peers over the long term [3,4]. Firms that effectively manage ESG risks often benefit from operational efficiencies, improved stakeholder trust, and access to cheaper capital [5]. However, most existing research aggregates ESG into a single score, overlooking the fact that the environmental, social, and governance pillars can have distinct and sometimes divergent relationships with financial performance [6,7].

At the same time, critical voices have highlighted a disconnect between ESG reporting and actual corporate behavior—a phenomenon often referred to as ESG decoupling [8]. Many companies are accused of engaging in symbolic reporting or greenwashing, using sustainability communication as a strategic image management tool without implementing substantive change [9,10]. This gap undermines the credibility of ESG data and raises questions about the true informational value of non-financial reporting.

Accounting, as a social and institutional practice, plays a pivotal role in this debate. Viewing accounting as a social practice means recognizing that it is not merely a technical or neutral activity, but one embedded in social contexts, influenced by cultural norms, institutional pressures, and power relations [11,12]. It both reflects and shapes organizational behavior and societal expectations. Non-financial reporting, such as ESG reports, does not merely report reality; it actively constructs it by shaping organizational legitimacy and influencing stakeholder perceptions [11,12].

However, the lack of uniformity in ESG reporting frameworks—such as the Global Reporting Initiative (GRI), the Sustainability Accounting Standards Board (SASB), and the Task Force on Climate-related Financial Disclosures (TCFD), and the absence of standardized assurance mechanisms—raise concerns about the comparability, consistency, and verifiability of reported data [13]. These limitations are particularly problematic when ESG reports are used by investors and regulators to assess long-term value and risk exposure.

Despite a growing body of literature linking ESG performance to financial performance, significant research gaps remain. First, many studies focus solely on the environmental pillar or use an undifferentiated ESG score [14,15], failing to capture the multidimensional nature of sustainability. Second, most analyses rely on a single measure of financial performance, typically stock returns or market value, rather than broader operational metrics such as Net Income or ROA. Third, the role of ESG controversies, which often reflect legitimacy crises and potential decoupling, is underexplored in relation to ESG reporting quality and consistency [16,17].

This study aims to address these gaps by conducting a multidimensional analysis of ESG reporting in relation to firm profitability and controversy exposure. Unlike previous research, we disaggregate ESG into its three pillars and analyze their respective relationships with two key profitability measures: Net Income and ROA. Furthermore, we examine whether firms facing ESG controversies, understood as reputational or ethical incidents, tend to exhibit poorer ESG performance disclosure.

The main objectives of this paper are as follows:

• To determine whether higher profitability leads to stronger ESG reporting across the environmental, social, and governance dimensions.
• To assess whether ESG controversies negatively affect ESG performance disclosure.

To achieve these goals, we analyze a panel of globally listed companies from 2019 to 2023, using ESG and financial data extracted from the Refinitiv database. By focusing on both financial drivers and reputational constraints, this study contributes to a more nuanced understanding of the dynamics underpinning ESG reporting behavior.

The remainder of this paper is structured as follows: Section 2 presents a review of the relevant literature and develops the hypotheses; Section 3 describes the methodology and dataset; Section 4 discusses the empirical findings; and Section 5 concludes with implications, limitations, and future research directions.

2. Literature Review

Corporate performance is a multifaceted construction that has been extensively explored in management research [3,5]. Scholars have long acknowledged that “performance” is not a unidimensional measure, but rather encompasses diverse metrics and stakeholder perspectives [18]. This ambiguity in definition and measurement leads to a variety of operationalizations, with some studies emphasizing financial outcomes (such as profitability and market share), while others consider broader social and environmental dimensions [19]. Accordingly, different streams of research have highlighted how financial performance, operational efficiency, and stakeholder-centric performance (e.g., ESG performance) represent distinct but interrelated facets of corporate success [3]. This plurality of approaches necessitates clarifying the specific disclosure performance dimensions in focus, which in this study are financial performance and ESG performance.

Financial performance refers to a firm’s ability to generate economic value and deliver returns to shareholders. Commonly measured through accounting-based indicators such as ROA, Return on Equity (ROE), and profit margins, as well as market-based indicators like stock returns, financial performance captures the core economic outcomes of a company [3]. These measures are central to traditional business strategy and serve as primary indicators of managerial effectiveness and competitiveness [5]. As such, financial performance remains the benchmark by which firms are evaluated by investors and often determines their access to resources and capital markets [18]. In this study, financial performance is operationalized through net income and ROA to capture its impact on ESG performance.

ESG performance encompasses how well a firm manages non-financial responsibilities and sustainability challenges, reflecting a multidimensional view of corporate accountability [20]. It goes beyond economic value creation to include social and environmental impacts, as well as governance practices that align with ethical standards and stakeholder expectations [18]. ESG performance disclosure is typically assessed through composite scores or external ratings that integrate data on environmental stewardship, social equity, and governance transparency [3]. Prior research shows that ESG performance disclosure can differ significantly from financial performance and should be analyzed independently to understand its implications for legitimacy and stakeholder relations [19]. In this paper, ESG performance disclosure is treated as a separate and critical dimension of corporate performance.

The relationship between ESG performance disclosure and corporate financial success, particularly firm profitability and firm value, has been extensively explored in recent decades. A robust body of literature provides both theoretical and empirical support for a positive association between corporate financial performance and ESG performance. From a stakeholder theory perspective [21], companies that engage proactively with a broad range of stakeholders—such as employees, customers, suppliers, communities, and regulators—are more likely to secure critical resources, enhance legitimacy, and reduce operational risks. These benefits translate into competitive advantages and superior financial outcomes over the long term. Ref. [22] empirically demonstrated that improvements in stakeholder engagement and social performance are positively associated with financial indicators such as sales growth and return on equity. Resource-based theory [23] also supports this linkage by suggesting that ESG practices can function as rare, valuable, and difficult-to-imitate organizational resources. For instance, firms with strong environmental and social governance structures may attract and retain more talented employees, foster innovation, improve brand loyalty, and ensure compliance with regulatory frameworks—all of which enhance profitability. Ref. [19] provides compelling evidence that environmental performance is positively correlated with firm profitability, particularly in dynamic and innovation-driven industries. Legitimacy theory [24] further posits that firms operate within a “social contract” and must align with prevailing societal norms to maintain legitimacy. ESG performance disclosure serves as a mechanism to signal alignment with these norms, thereby preserving a firm’s social license to operate. Enhanced legitimacy can reduce transaction costs and increase investor and consumer confidence, ultimately improving financial outcomes [25]. In addition, institutional theory suggests that firms conform to ESG standards in response to institutional pressures—such as industry norms, regulatory expectations, and investor activism—thus enhancing their legitimacy and long-term value [26].

Meta-analyses by [3,4] synthesized hundreds of empirical studies, concluding that the majority of evidence supports a positive association between ESG practices and financial performance. Ref. [14] found that companies with stronger ESG engagement tend to outperform peers in terms of profitability, cost efficiency, and risk mitigation. Nevertheless, findings remain partially inconsistent across contexts, methodologies, and performance indicators [6,7,15,27,28,29]. Some studies argue that sustainability initiatives can improve operational efficiency, reduce costs, and enhance brand equity, ultimately generating financial value [2,30]. Others posit that ESG investments may lead to increased compliance costs and uncertain returns, particularly in low-margin industries or weak regulatory environments [31,32]. Industry-specific factors and country-level institutional frameworks often mediate these relationships, highlighting the importance of contextual variables in ESG performance dynamics [33]. Regarding the environmental pillar, evidence suggests that profitable firms are more likely to engage in and report on environmental practices. Ref. [15], in a study of Egyptian listed companies, found that higher profitability leads to greater environmental disclosure, as financially strong firms are better positioned to absorb the costs of transparency. Ref. [34] reported similar findings in the United Kingdom (UK) context, noting that firms with greater financial resources are more likely to publish detailed environmental reports. More recently, ref. [29] showed that environmental disclosure acts as a mediator between industry type and profitability in Portugal, reinforcing the view that profitability supports more extensive sustainability reporting. Cross-country evidence also supports this view. Ref. [28] found that overall ESG scores correlate positively with profitability across multiple jurisdictions. However, their findings indicate that environmental scores, when analyzed independently, do not show a statistically significant relationship with firm value. This reinforces the need to disaggregate ESG components when analyzing performance outcomes. Ref. [6] demonstrated a positive link between ESG scores and Return on Assets (ROA) in German-listed firms, while ref. [32] found that strong ESG engagement improves firm valuation among U.S.-based companies. Similarly, ref. [35] using legitimacy and stakeholder theories, confirmed a positive relationship between corporate profitability and ESG reporting in Thai firms. Despite the predominance of positive findings, some studies challenge this optimistic view. Ref. [27], analyzing Chinese listed firms, found that mandatory CSR reporting may negatively impact profitability due to increased costs and administrative burden. Ref. [7] reported that financial performance disclosure negatively moderates the relationship between stakeholder engagement and environmental disclosure in a cross-national sample, suggesting that more profitable firms might resist stakeholder pressure when disclosure is seen as non-strategic. According to [36], consistent empirical evidence shows that strong ESG performance disclosure contributes to superior financial outcomes. Their comprehensive review of over 200 academic studies reveals that companies integrating sustainability into their core business strategies tend to benefit from enhanced operational efficiency, lower cost of capital, and improved cash flow generation. Moreover, ESG-oriented firms are often better positioned to manage long-term risks and seize emerging market opportunities, resulting in more stable earnings and stronger overall financial performance. These findings support the hypothesis that ESG performance disclosure is not only a reflection of corporate ethical commitment but also a driver of financial value. Furthermore, ref. [29] confirmed that profitability positively influences the extent of environmental information disclosed in both financial and sustainability reports.

Given the weight of theoretical and empirical evidence supporting a positive linkage between financial performance and ESG disclosure, especially in firms with higher resource availability and reputational incentives, we posit the following hypothesis:

H1. 

Corporate financial performance is positively associated with ESG performance disclosure.

In parallel, ESG controversies present significant threats to a company’s legitimacy, stakeholder trust, and perceived sustainability commitment. These controversies—ranging from environmental disasters and labor rights violations to governance failures and ethical misconduct—generate negative public scrutiny and often lead to lower ESG ratings by external agencies. From a legitimacy theory perspective, firms operate under a “social contract” wherein their survival and success depend on their alignment with societal norms and expectations [24]. According to [17], ESG controversies arise from firm behaviors that raise ethical or regulatory concerns, triggering reputational risks and legitimacy threats. ESG controversies create a legitimacy gap, reducing the firm’s perceived conformity to social values and endangering its “social license to operate” [20]. This results in increased reputational risks and, ultimately, a negative reassessment of the firm’s ESG performance disclosure. In addition, institutional theory [37], suggests that firms are subject to institutional pressures that enforce conformity to socially accepted standards, including ESG norms. ESG controversies reveal a failure to conform to those norms and may trigger institutional sanctions, stakeholder disengagement, and rating downgrades, all of which undermine perceived ESG performance disclosure. Signaling theory [38], further supports the negative association between controversies and ESG ratings. ESG disclosures and ratings act as signals to stakeholders and investors about the firm’s values, risk management, and ethical behavior. Controversies send negative counter-signals that reduce the credibility of earlier ESG disclosures, prompting rating agencies and markets to penalize firms, even when formal ESG policies are in place [20]. This perception of inconsistency between what is disclosed and what is practiced undermines ESG scores. Lastly, within the scope of stakeholder theory [21], controversies negatively affect stakeholder relationships by violating implicit expectations of responsible conduct. Stakeholders—particularly institutional investors, employees, and civil society—are increasingly sensitive to ESG controversies, and their reactions can amplify reputational damage, leading to deteriorated ESG assessments.

Empirical studies confirm that firms exposed to controversies often experience a decline in ESG scores, regardless of prior sustainability commitments [20]. Ref. [10], in a systematic literature review, outlined two conceptualizations of greenwashing: (1) selective disclosure, where companies with poor sustainability performance disclosure highlight only positive outcomes, and (2) decoupling—where firms publicly commit to sustainability goals but fail to implement concrete actions [1]. These practices compromise the credibility of ESG reporting and increase information asymmetry between firms and stakeholders [1]. Despite their importance, ESG controversies remain under-investigated, particularly regarding their influence on the quality of ESG reporting. Ref. [20] emphasizes the need for deeper research on how such controversies affect transparency and stakeholder engagement, noting that few studies have examined their impact on reporting behavior and perceived legitimacy.

Taken together, these theoretical frameworks support Hypothesis H2 by explaining how ESG controversies act as powerful negative signals that compromise perceived ESG performance disclosure, despite prior efforts or reporting.

H2. 

ESG controversies are negatively associated with ESG performance disclosure.

3. Materials and Methods

This research adopts a quantitative approach, employing panel data analysis to explore the impact of corporate financial performance and ESG controversies on ESG performance disclosure. The dataset contains 5722 publicly cross-country listed companies sourced from the LSEG Refinitiv database for the period 2019–2023, resulting in an unbalanced panel data set of 28,274 observations. This timeframe was selected to capture the most recent developments in ESG disclosure and corporate performance, particularly in light of increased regulatory attention, investor scrutiny, and global events, such as the COVID-19 pandemic, that have significantly influenced corporate sustainability practices.

Table 1 presents the dependent, independent, and control variables used in this study. The main dependent variable is the overall ESG disclosure score (ESGS), along with its three sub-pillars: Environmental Score (ES), Social Score (SS), and Governance Score (GS), which allow for a more granular analysis of ESG performance. The key independent variables are net income and ESG controversies. Net income is used as a proxy for firm profitability, based on the premise that financial performance may influence, or be influenced by, ESG engagement, as supported by prior literature [16,29,39]. ESG controversies—defined as reputational or ethical incidents—are included to capture the negative externalities that may undermine a firm’s ESG performance disclosure, reflecting the idea that controversies signal lapses in corporate responsibility. As provided by LSEG Refinitiv, the ESG Controversies score is inversely coded, with higher values indicating fewer controversies. This was considered in the interpretation of the regression results.

To mitigate potential endogeneity concerns, particularly reverse causality between profitability and ESG performance reporting, the ESG scores were measured for the year following the financial indicators. That is, ESGS and its sub-pillars refer to year t + 1, while Net Income and other predictors refer to year t. This temporal structure ensures that financial performance precedes the ESG outcome, reducing the likelihood of simultaneity bias. In addition, firm and year fixed effects were applied to control for unobserved heterogeneity across companies and over time, further improving the robustness of the estimations.

To ensure the robustness of the analysis, several firm-specific characteristics are included as control variables, such as, leverage, industry, and region, following established practices in the literature [16,35,40,41,42,43]. These controls help isolate the effects of profitability and controversies on ESG performance by accounting for structural and contextual differences across firms.

Although the analysis disaggregates ESG performance into its three core dimensions—ES, SS, and GS—no separate hypotheses were formulated for each pillar. This decision was based on the understanding that the theoretical foundations of H1 and H2 apply uniformly across all ESG dimensions. The objective was to examine whether the associations between corporate financial performance, ESG controversies, and overall ESG performance are consistent across the individual ESG pillars (Environmental, Social, and Governance), rather than assuming that each pillar operates through entirely distinct underlying mechanisms.

Furthermore, the decision not to formulate distinct hypotheses for each ESG pillar was made to avoid unnecessary fragmentation of the theoretical framework. Introducing separate hypotheses for each dimension could complicate the model without offering additional theoretical value, especially given that the literature often treats ESG as an integrated construct. Instead, we maintain theoretical parsimony by focusing on the overall ESG performance. The disaggregated models—analyzing each pillar separately—are employed as robustness checks. This allows us to assess whether the observed effects at the aggregate ESG level are predominantly driven by any specific dimension, without the need to formulate separate, potentially redundant, theoretical predictions for each pillar.

Hence, we propose the following equations:

$$\begin{gathered} ESGS={\propto }_0+{\propto }_1{Netincome}_{i,t}+{\propto }_{2}ESGControversies+{\propto }_3{CGoveBCommittee}_{i,t}+{\propto }_4{CSRCommitte}_{i,t} \\ +{\propto }_5{ShareholdersScore}_{i,t}+{\propto }_6{EUTaxonomy}_{i,t}+{\propto }_7{AdvertisingExpense}_{i,t} \\ +{\propto }_8{RDExpense}_{i,t}+{\propto }_9{Leverage}_{i,t}+{\propto }_{10}{Country}_i+{\propto }_{11}{Sector}_i{\propto }_{12}{Year}_t+{\epsilon }_{it}+{\eta }_i \end{gathered}$$

(1)

$$\begin{gathered} ES={\propto }_0+{\propto }_1{Netincome}_{i,t}+{\propto }_{2}ESGControversies+{\propto }_3{CGoveBCommittee}_{i,t}+{\propto }_4{CSRCommitte}_{i,t} \\ +{\propto }_5{ShareholdersScore}_{i,t}+{\propto }_6{EUTaxonomy}_{i,t}+{\propto }_7{AdvertisingExpense}_{i,t} \\ +{\propto }_8{RDExpense}_{i,t}+{\propto }_9{Leverage}_{i,t}+{\propto }_{10}{Country}_i+{\propto }_{11}{Sector}_i{\propto }_{12}{Year}_t+{\epsilon }_{it}+{\eta }_i \end{gathered}$$

(2)

$$\begin{gathered} SS={\propto }_0+{\propto }_1{Netincome}_{i,t}+{\propto }_{2}ESGControversies+{\propto }_3{CGoveBCommittee}_{i,t}+{\propto }_4{CSRCommitte}_{i,t} \\ +{\propto }_5{ShareholdersScore}_{i,t}+{\propto }_6{EUTaxonomy}_{i,t}+{\propto }_7{AdvertisingExpense}_{i,t} \\ +{\propto }_8{RDExpense}_{i,t}+{\propto }_9{Leverage}_{i,t}+{\propto }_{10}{Country}_i+{\propto }_{11}{Sector}_i{\propto }_{12}{Year}_t+{\epsilon }_{it}+{\eta }_i \end{gathered}$$

(3)

$$\begin{gathered} GS={\propto }_0+{\propto }_1{Netincome}_{i,t}+{\propto }_{2}ESGControversies+{\propto }_3{CGoveBCommittee}_{i,t}+{\propto }_4{CSRCommitte}_{i,t} \\ +{\propto }_5{ShareholdersScore}_{i,t}+{\propto }_6{EUTaxonomy}_{i,t}+{\propto }_7{AdvertisingExpense}_{i,t} \\ +{\propto }_8{RDExpense}_{i,t}+{\propto }_9{Leverage}_{i,t}+{\propto }_{10}{Country}_i+{\propto }_{11}{Sector}_i{\propto }_{12}{Year}_t+{\epsilon }_{it}+{\eta }_i \end{gathered}$$

(4)

Table 1. Regression variable definition.

Variable	Definition	Literature	Scale
Dependent variables
ESGS	LSEG Data & Analytics’ ESG Score is a global company score based on information reported across the environmental, social and corporate governance pillars.	[44]	(0 to 100)
ES	Environmental performance according to the Refinitiv methodology, including measures of resources, emissions and environmental innovations.
SS	Social performance according to the LSEG Data & Analytics methodology, including measures related to labor, human rights, community and product safety.
GS	Governance performance in accordance with the LSEG Data & Analytics methodology, including management measures, shareholders and ESG strategy.
Independent variables
Netincome	Company’s total profit after subtracting all expenses, including operating costs, taxes, interest, and depreciation, from total revenue. It represents the bottom line of a company’s income statement and indicates its overall financial health and profitability.	[29,39]	Euro
ROA	Companies’ profitability relative to their total assets. It shows how efficient management uses assets to generate net income.	[45]	(−100 to 100)
ESGControversies	The ESG controversies score is calculated based on 23 ESG controversy topics. During the year, if a scandal occurs, the company involved is penalized and this affects their overall ESGC score and grading. The impact of the event may still be seen in the following year if there are new developments related to the negative event, e.g., lawsuits, ongoing legislation disputes or fines. All new media materials are captured as the controversy progresses. The controversies score also addresses the market cap bias from which large cap companies suffer, as they attract more media attention than smaller cap companies.	[16,35,42,43,44]	(0 to 100)
Control variables
CGoveBCommittee	Dummy variable for the presence of a Governance Board Committee.	[41]	(0 or 1)
CSRCommitte	Dummy variable for the presence of a CSR committee.	[40,41]	(0 or 1)
ShareholdersScore	The shareholder value scores measure a company’s effectiveness toward equal treatment of shareholders and the use of anti-takeover devices.	[42]	(0 to 100)
EUTaxonomy	Percentage of revenue classified as “green” under EU Taxonomy.	[46]	(0 to 100)
AdvertisingExpense	Advertising Expense.	[35,42]	Million €
RDExpense	Research and Development Expense.	[35,42]	Million €
Leverage	Debt-to-asset ratio.	[16]	(0 to 100)

Table 1. Regression variable definition.

Variable	Definition	Literature	Scale
Dependent variables
ESGS	LSEG Data & Analytics’ ESG Score is a global company score based on information reported across the environmental, social and corporate governance pillars.	[44]	(0 to 100)
ES	Environmental performance according to the Refinitiv methodology, including measures of resources, emissions and environmental innovations.
SS	Social performance according to the LSEG Data & Analytics methodology, including measures related to labor, human rights, community and product safety.
GS	Governance performance in accordance with the LSEG Data & Analytics methodology, including management measures, shareholders and ESG strategy.
Independent variables
Netincome	Company’s total profit after subtracting all expenses, including operating costs, taxes, interest, and depreciation, from total revenue. It represents the bottom line of a company’s income statement and indicates its overall financial health and profitability.	[29,39]	Euro
ROA	Companies’ profitability relative to their total assets. It shows how efficient management uses assets to generate net income.	[45]	(−100 to 100)
ESGControversies	The ESG controversies score is calculated based on 23 ESG controversy topics. During the year, if a scandal occurs, the company involved is penalized and this affects their overall ESGC score and grading. The impact of the event may still be seen in the following year if there are new developments related to the negative event, e.g., lawsuits, ongoing legislation disputes or fines. All new media materials are captured as the controversy progresses. The controversies score also addresses the market cap bias from which large cap companies suffer, as they attract more media attention than smaller cap companies.	[16,35,42,43,44]	(0 to 100)
Control variables
CGoveBCommittee	Dummy variable for the presence of a Governance Board Committee.	[41]	(0 or 1)
CSRCommitte	Dummy variable for the presence of a CSR committee.	[40,41]	(0 or 1)
ShareholdersScore	The shareholder value scores measure a company’s effectiveness toward equal treatment of shareholders and the use of anti-takeover devices.	[42]	(0 to 100)
EUTaxonomy	Percentage of revenue classified as “green” under EU Taxonomy.	[46]	(0 to 100)
AdvertisingExpense	Advertising Expense.	[35,42]	Million €
RDExpense	Research and Development Expense.	[35,42]	Million €
Leverage	Debt-to-asset ratio.	[16]	(0 to 100)

4. Results

4.1. Descriptive Statistics

Table 2. Regression variable descriptives statistics.

Variables	Obs	Mean	Std. Dev.	Min	Max
Dependent
ESGS	28,274	50.14	20.502148	0.60676582	95.381086
ES	28,274	44.42	28.51288	0	99.260205
SS	28,274	51.85	23.332377	0.15141437	98.632155
GS	28,274	53.51	22.253393	0.14118896	99.414248
Independent
Netincome	28,274	6.501 × 108	3.039 × 109	−1.339 × 1011	1.030 × 1011
ROA	28,274	0.00602466	0.30579878	−25.107773	5.019803
ESG controv	28,274	91.940634	21.33586	0.36231884	100
Control
CGoveBCommittee	28,274	0.45880106	0.49830811	0	1
CSRCommitte	28,274	0.36712466	0.48202897	0	1
ShareholdersScore	28,274	51.443903	28.558551	0.01440507	99.98489
EU taxonomy	28,274	5.8231513	17.249448	0	100
AdvertisingExpense	28,274	45,650,730	3.785 × 108	−34,500,000	1.925 × 1010
RDExpense	28,274	2.387 × 108	1.566 × 1010	0	2.690 × 1012
Leverage	28,274	1.4570698	14.676057	−0.4381277	1835.8889

presents the descriptive statistics for all variables included in the empirical analysis.

The mean overall ESG score (ESGS) is 50.14, with a standard deviation of 22.50 and a wide range from 0.61 to 95.38, indicating heterogeneous sustainability practices and disclosures among firms. Breaking this down by ESG dimension, the Environmental Score (ES) has a mean of 44.42 and a notably high standard deviation of 28.51, with values spanning from 0 to 99.26, suggesting diverse levels of environmental engagement. The Social Score (SS) averages 51.85 (SD = 23.33), with a minimum of 0.15 and a maximum of 98.63, pointing to varying levels of commitment to social responsibility, labor rights, and community relations. The Governance Score (GS) has a slightly higher average of 53.51 and a standard deviation of 22.25, with a range from 0.14 to 99.41, capturing differences in corporate governance structures, board effectiveness, transparency, and shareholder protections. It is important to note that a high ESGS does not necessarily imply deep or substantive engagement with ESG issues, but rather reflects the level of ESG disclosure and reported practices as assessed by third-party rating agencies.

The study considers two independent variables to measure corporate financial performance: net income and ROA. Net income shows a mean of approximately 650 million with a very high standard deviation (around 3 billion), ranging from −133.9 billion to 103 billion, indicating substantial variability in firm profitability. ROA has a mean close to zero (0.006) and a standard deviation of 0.31, with minimum and maximum values of −25.11 and 5.02, respectively, reflecting that some firms operate at a loss relative to their assets while others achieve positive returns.

The ESG Controversy score, also treated as an independent variable, has a mean of 91.94 and a standard deviation of 21.34, with values ranging from 0.36 to 100. A score of zero indicates the presence of significant controversies, while higher scores reflect fewer incidents and thus lower reputational and legitimacy risks related to environmental, social, or governance failures.

Among the control variables, leverage has a mean of 1.46, a high standard deviation of 14.68, and ranges from −0.44 to 1835.89, indicating significant heterogeneity in financial structures across firms. Other control variables include binary indicators such as the presence of Corporate Governance Board Committees and CSR Committees, with means around 0.46 and 0.37, respectively, indicating the proportion of firms with these governance mechanisms. Shareholders Score averages 51.44 (SD = 28.56), ranging from 0.01 to 99.98, and EU Taxonomy alignment shows a mean of 5.82 with considerable variation (SD = 17.25), reflecting differing degrees of sustainability classification compliance. Advertising and R&D expenses also display large variances, highlighting diverse strategic investments across firms.

These descriptive statistics demonstrate substantial variability across all variables, justifying the use of regression models to explore the hypothesized relationships between financial performance, ESG practices, and controversies.

The Pearson correlation matrix (

Table 3. Pairwise correlations—main model.

Variables	VIF	(1)	(2)	(3)	(4)	(5)	(6)	(7)	(8)	(9)	(10)
(1) ESGScore		1.0000
(2) Netincome	1.11	0.1757 *	1.0000
(3) ESG_controv	1.12	−0.2565 *	−0.2511 *	1.0000
(4) CGoveBCommittee	1.03	−0.0076	−0.0271 *	0.0890 *	1.0000
(5) CSR_Committe	1.06	−0.6153 *	−0.1063 *	0.1600 *	−0.0847 *	1.0000
(6) ShareholdersScore	1.02	0.2438 *	0.0108	−0.0565 *	−0.0600 *	−0.1057 *	1.0000
(7) EU_taxonomy	1.01	0.1033 *	−0.0069	0.0191 *	0.0247 *	−0.0779 *	0.0053	1.0000
(8) AdvertisingExpense	1.06	0.0985 *	0.1934 *	−0.1743 *	−0.0343 *	−0.0551 *	0.0285 *	−0.0210 *	1.0000
(9) RDExpense	1.00	0.0071	0.0357 *	−0.0240 *	0.0028	0.0021	0.0028	−0.0011	0.0307 *	1.0000
(10) Leverage	1.00	0.0068	−0.0001	−0.0234 *	−0.0170 *	−0.0053	0.0048	−0.0100	−0.0007	−0.0001	1.0000

Legend: * p < 0.1; VIF-Variance Inflation Factor.

) indicates that the ESGS variable does not exhibit high correlation with any of the independent or control variables across all models—including the primary analysis and both robustness checks—as none of the absolute correlation coefficients exceed the 0.8 threshold. While some studies suggest a Variance Inflation Factor (VIF) threshold of 10 as the upper limit for concern, more conservative approaches recommend a lower cutoff of 5. In our analysis, all VIF values remain well below these thresholds, with the highest observed VIF being [1.11] and the lowest being [1.00]. These results confirm that multicollinearity is not a serious concern, and the relationships among explanatory variables are sufficiently moderate to ensure the reliability and interpretability of the regression estimates [1,41].

4.2. Regression Results

The regression analysis (

Table 4. Random effect results (models 1 to 4).

Variables	(1) Overall ESGS	ESG Pillars
		(2) ES	(3) SS	(4) GS
	Coef (Std. Error)
Netincome	0.000000000195 (0.000000000246) ***	0.000000000270 (0.000000000344) ***	0.000000000223 (0.000000000309) ***	0.000000000150 (0.000000000374) ***
ESG_controv	−0.019 (0.002) ***	−0.034 (0.003) ***	−0.024 (0.003) ***	−0.008 (0.004) **
CGoveBCommittee	−6.742 (0.246) ***	−4.583 (0.343) ***	−5.253 (0.308) ***	−10.685 (0.367) ***
CSR_Committe	−11.837 (0.140) ***	−16.304 (0.196) ***	−12.669 (0.177) ***	−7.724 (0.217) ***
ShareholdersScore	0.099 (0.003) ***	0.023 (0.004) ***	0.031 (0.003) ***	0.259 (0.004) ***
EU_taxonomy_greerev	0.065 (0.007) ***	0.109 (0.010) ***	0.051 (0.009) ***	0.032 (0.010) ***
AdvertisingExpense	0.000000000902 (0.000000000224) ***	0.000000001400 (0.000000000312) ***	0.000000001200 (0.000000000280) ***	0.000000000500 (0.000000000332)
RDExpense	0.000000000000 (0.000000000003)	0.000000000004 (0.000000000004)	0.000000000002 (0.000000000003)	−0.000000000003 (0.000000000004)
Leverage	−0.001 (0.003)	0.001 (0.004)	−0.002 (0.003)	−0.000 (0.004)
R2	46.77	47.93	39.84	34.05
Number of obs	28,274
Number of groups	5722
Hausman Test	Chi2(6) = 5064.94, p-value = 0.0000	Chi2(6) = 4803.49, p-value = 0.0000	Chi2(6) = 543.07, p-value = 0.0000	Chi2(6) = 558.71, p-value = 0.0000

Legend: *** p < 0.01, ** p < 0.05.

) reveals that net income has a consistent and statistically significant positive relationship with ESG performance disclosure (ESGS) across all models. Specifically, for the overall ESG score, the coefficient is (β = 1.95e−10 with a p-value < 0.001), indicating that more profitable firms are more likely to have higher ESG performance disclosure. This positive relationship holds for the environmental (β = 2.70e−10; p < 0.001), social (β = 2.23e−10; p < 0.001), and governance (β = 1.50e−10; p < 0.001) pillars as well, reinforcing the view that firm profitability is an important driver of ESG reporting, proving the H1.

Conversely, ESG controversies show a negative and statistically significant association with all ESG dimensions, supporting H2. For the overall ESG score, the coefficient is β = −0.0197 (p < 0.001), suggesting that companies involved in more controversies tend to have worst ESG performance disclosure. This negative relationship is even stronger for the environmental (β = −0.0344; p < 0.001) and social (β = −0.0242; p < 0.001) pillars. The governance pillar also shows a significant but smaller negative effect (B = −0.0082; p < 0.01). These findings imply that controversies undermine ESG transparency, possibly due to reputational damage or loss of stakeholder trust.

4.3. Robust Test Results

To assess the robustness of our findings, we re-estimated all models by replacing net income after tax with ROA as the proxy for financial performance. The results, presented in

Table 5. Robust test results.

	ESGS	ES	SS	GS
ROA	0.924 (0.201) ***	0.000000000219 (0.000000000135) *	0.000000000403 (0.000000000142) ***	0.000000000181 (0.000000000162) *
ESG_controv	−0.021 (0.002) ***	−0.019 (0.006) ***	−0.020 (0.006) ***	−0.021 (0.007) ***
CGoveBCommittee	−6.779 (0.246) ***	−6.486 (0.566) ***	−4.934 (0.597) ***	−8.739 (0.667) ***
CSR_Committe	−11.901 (0.141) ***	−14.325 (0.379) ***	−15.863 (0.398) ***	−8.479 (0.453) ***
ShareholdersScore	0.100 (0.003) ***	0.044 (0.007) ***	0.037 (0.007) ***	0.273 (0.008) ***
EU_taxonomy	0.064 (0.007) ***	0.071 (0.020) ***	0.117 (0.022) ***	0.046 (0.020) **
AdvertisingExpense	0.000000000997 (0.000000000224) ***	0.000000002010 (0.000000000628) ***	0.000000002170 (0.000000000670) ***	0.000000001480 (0.000000000695) **
RDExpense	0.000000000000 (0.000000000003)	0.000000000785 (0.000000000254) ***	0.000000000954 (0.000000000270) ***	0.000000000249 (0.000000000285)
Leverage	−0.001 (0.003)	0.027 (0.026)	0.012 (0.027)	0.053 (0.032)
Constant | control for sector, country and year
R2	46.42	42.49	41.59	42.33
Number of obs	28,274	28,274	28,274	28,274
Number of groups	5722	5722	5722	5722
Hausman Test	Chi2(6) = 1005.70, p-value = 0.0000	Chi2(6) = 1184.84, p-value = 0.0000	Chi2(6) = 262.07, p-value = 0.0000	Chi2(6) = 127.33, p-value = 0.0000

Legend: *** p < 0.01, ** p < 0.05, * p < 0.1.

, are consistent with all models and support the robustness of our conclusions.

The coefficient for ROA is positive and statistically significant for overall ESGS (β = 0.924; p < 0.001) and across all individual ESG dimensions, reinforcing the idea that firms with stronger financial performance are more likely to disclose higher levels of ESG performance disclosure. This aligns with previous research suggesting that profitable firms have more resources and incentives to engage in sustainability reporting.

Moreover, ESG controversies remain negatively associated with the overall ESG score (β = −0.021; p < 0.001) and individual ESG dimensions, confirming the earlier result: companies facing ESG-related controversies tend to report lower ESG performance disclosure. This consistency further supports the argument that such firms may avoid extensive disclosure when their reputational legitimacy is threatened.

To address other’s potential endogeneity concerns, particularly the possibility that Net Income may be endogenous in explaining ESGS, we applied an instrumental variables (IV) approach using ROA as an instrument for Net Income. ROA is strongly correlated with profitability but is assumed to affect ESG disclosure only through its impact on Net Income (

Table 6. Endogeneity test.

Tests of Endogeneity
Ho: variables are exogenous
Durbin (score) chi2(1) = 10.6005 (p = 0.0011)
Wu–Hausman F(17,152) = 10.5999 (p = 0.0011)

).

The IV estimation was conducted using two-stage least squares (2SLS). The Durbin and Wu–Hausman tests rejected the null hypothesis of exogeneity, confirming the presence of endogeneity and justifying the use of the IV approach. The results of the IV regression are consistent with our main findings, reinforcing the positive relationship between profitability and ESG performance.

These robustness checks enhance the credibility of our results by mitigating potential biases arising from reverse causality or omitted variables.

5. Discussion

The findings of this study provide robust empirical support for the hypothesized relationships between corporate financial performance, ESG controversies, and ESG reporting. In line with H1, the regression results consistently reveal a positive and statistically significant association between firm profitability and ESG performance disclosure across all models and ESG pillars. Whether measured by net income or ROA, more profitable firms tend to disclose higher ESG scores, suggesting that financial strength facilitates sustainability engagement and reporting. These results corroborate prior evidence presented by [3,4,14], which points to profitability as a key enabler of ESG integration.

From a theoretical standpoint, this finding aligns with legitimacy theory, as financially successful firms may engage in ESG reporting to reinforce their legitimacy and public accountability. Likewise, stakeholder theory posits that companies with more resources are better equipped to meet stakeholder expectations regarding transparency and social responsibility [2,29]. The positive relationship across the three ESG pillars suggests that profitability influences not only overall ESG scores but also the depth and breadth of disclosure in specific dimensions, supporting the claim that ESG performance is multifaceted and financially conditioned [6].

This finding aligns with stakeholder theory [21], which posits that attending to the needs of multiple stakeholders through strong ESG initiatives can foster goodwill and ultimately enhance financial performance. It is also consistent with a resource-based view of the firm [23], which considers effective ESG practices as valuable intangible resources that may confer competitive advantage. Empirical evidence supports this resource-based logic; for example, firms with proactive environmental management have been shown to achieve higher profitability [19]. Overall, our results reinforce prior findings that better corporate social performance disclosure tends to go hand in hand with improved financial performance [18,22].

However, this optimistic view is not unchallenged. Scholars such as [7,27] argue that financial success may, in some contexts, reduce firms’ perceived need for voluntary disclosure, especially if stakeholders view disclosure as secondary to economic outcomes. Nonetheless, our findings, across both the main and robustness models, suggest the opposite—that profitability enhances ESG transparency, reinforcing ESG’s strategic role rather than a compliance burden.

In contrast, the consistent negative and significant relationship between ESG controversies and ESG performance disclosure supports H2, highlighting the reputational cost associated with unethical, irresponsible, or legally questionable corporate behavior. This result confirms the arguments of [17,20], who emphasize the adverse effects of controversies on stakeholder trust and legitimacy. From a legitimacy perspective, controversies signify a failure to meet societal and stakeholder expectations, thereby threatening the organization’s social license to operate [24,25]. These incidents also erode stakeholder trust and goodwill [21], tarnishing the firm’s reputation and likely contributing to lower ESG performance disclosure evaluations. In signaling terms, an ESG controversy sends a negative signal to the market about the firm’s values and management quality [38], which can deter investors and business partners. Furthermore, institutional theory suggests that deviating from normative standards of corporate responsibility elicits negative institutional pressures [37]; consequently, firms embroiled in controversies may face sanctions or reputational penalties, leading to diminished ESG performance disclosure.

Interestingly, the magnitude of this negative effect is strongest in the environmental and social pillars, which may reflect greater public sensitivity to environmental degradation and social injustices, compared to governance practices that are often less visible to external stakeholders. These results also align with [10] and [1], who distinguish between symbolic and substantive ESG disclosure. Controversial firms may resort to greenwashing or selective disclosure, reducing overall transparency to mitigate reputational exposure.

The findings highlight an important nuance: firms under controversy may deliberately limit ESG disclosures, contrary to what signaling theory might suggest. While signaling theory posits that disclosure serves to reduce information asymmetry [38], our results indicate that controversial firms might avoid transparent disclosure to obscure negative performance or ongoing regulatory scrutiny—a behavior consistent with the decoupling logic in institutional theory [10].

From a policy and managerial perspective, the results underscore the need for stronger ESG assurance mechanisms and independent verification, particularly for firms facing reputational risks. Regulators and stakeholders should not only encourage disclosure but also scrutinize its credibility, especially in industries or regions prone to greenwashing or inconsistent ESG behaviors.

In summary, the discussion reinforces the theoretical expectations underpinning H1 and H2. Profitability acts as a driver of substantive ESG reporting, while controversies suppress transparency, possibly through reputational shielding. These findings contribute to a more nuanced understanding of ESG behavior, integrating economic performance with legitimacy and reputational dynamics.

6. Conclusions

ESG performance disclosure has rapidly become a critical component of corporate evaluation and strategy, moving to the forefront of both academic discourse and business practice [18,21]. Investors and regulators now expect firms not only to deliver strong financial results but also to demonstrate transparency in environmental, social, and governance domains [25]. However, this momentum has not been without resistance—recent backlash against ESG initiatives has emerged, with critics questioning their effectiveness, politicization, and influence on capital allocation. Despite this, a growing body of research suggests that companies with robust ESG practices can achieve superior long-term financial performance [19,22].

There is an ongoing debate about the credibility of ESG disclosures. Scholars have identified a troubling “ESG decoupling” between what companies report and their actual behavior, with many firms accused of superficial sustainability reporting or greenwashing [24,37]. As a result, questions remain about what truly drives ESG performance disclosure. Prior studies often adopt a narrow scope—focusing on a single ESG pillar or using composite scores—and seldom consider the impact of ESG controversies. This gap in the literature signals the need for a more nuanced analysis of how financial success and negative ESG events jointly influence a company’s ESG outcomes, which is the focus of this study.

This research investigates the relationship between corporate financial performance and ESG controversies among cross-country listed firms. Specifically, it tests two hypotheses: (H1) that firm profitability is positively associated with ESG performance disclosure, and (H2) that ESG controversies are negatively associated with such reporting. Grounded in legitimacy theory and stakeholder theory, the study analyzes a large panel dataset using fixed effects regression models. Model selection was guided by robust statistical testing—including the Hausman and Breusch–Pagan LM tests—which strongly supported the fixed effects specification over random effects or pooled OLS. These diagnostics ensure the consistency and validity of the estimated results.

The empirical findings strongly support both hypotheses. Profitability, whether measured by net income or ROA, shows a consistent and statistically significant positive association with ESG performance disclosure. This reinforces the argument that firms with greater financial resources are better positioned to invest in ESG strategies and communicate them effectively. ESG transparency, therefore, may function as both a signal of substantive commitment and a tool for maintaining stakeholder trust and legitimacy.

Conversely, this study finds that ESG controversies are significantly and negatively associated with ESG performance disclosure. Firms facing environmental, social, or governance-related incidents appear to reduce transparency or engage in symbolic disclosure practices—likely as a means of managing reputational risk. This challenges more optimistic interpretations of ESG as purely driven by intrinsic values or signaling theory and highlights the strategic, and at times defensive, nature of corporate sustainability communication.

Theoretically, this study contributes to the literature by validating the dual role of profitability and controversies in shaping ESG disclosure behavior. By integrating insights from legitimacy, stakeholder, and institutional theories, it underscores the complexity of ESG reporting—where transparency may reflect both genuine efforts and strategic image management.

Practically, the results have clear implications for regulators, investors, and ESG rating agencies. Policymakers should strengthen ESG reporting frameworks, such as those being developed under IFRS Sustainability Standards (S1 and S2), and ensure mechanisms for third-party verification. These steps are essential to mitigate greenwashing and promote disclosure credibility. Investors should be cautious in interpreting ESG scores, particularly for firms with known controversies, and demand greater transparency and consistency.

While this study offers strong evidence of financial and reputational drivers of ESG disclosure, it is not without limitations. It relies on ESG scores and controversies reported by third-party rating agencies, which may differ in methodology or coverage. The treatment of endogeneity in this paper provides a useful starting point, although the choice of ROA as an instrument for net income has limitations; future studies could strengthen causal inference by applying alternative approaches such as Generalized Method of Moments or natural experiments. Future research could examine how these dynamics differ across developed versus emerging markets, or incorporate textual analysis of sustainability reports to assess the tone, depth, and credibility of disclosures.

Furthermore, while the current analysis uses contemporaneous ESG and pillar scores, we acknowledge the potential for lagged effects, where ESG performance in one period may influence outcomes over a longer time horizon. This is particularly relevant given the delayed materialization of ESG-related risks or benefits. In this version, lags were not incorporated to maintain focus on direct and immediate relationships. However, future studies should consider lagged ESG variables to explore cumulative or delayed effects—helping to clarify the temporal dynamics of ESG integration.

In sum, this study sheds light on the complex incentives behind ESG reporting. While financial strength encourages transparency, reputational risks—especially controversies—can undermine it. This duality highlights the importance of not only scrutinizing what firms disclose, but also why and under what conditions. Understanding these drivers is essential to building a more credible, transparent, and effective ESG reporting landscape.