ESG and ESG controversies on firm risks in the emerging markets: The moderating roles of Shariah screening and legal origins

Abstract

Purpose – This study examines the impact of environmental, social and governance (ESG) and ESG controversies on firm risk, and proposes the moderating roles of Shariah screening and legal systems over the relationship. Design/Methodology – The research data were 522 firms from 16 emerging markets over the period 2013-2021 (4689 observations). The data (i.e., ESG, financial data, etc.) obtained from the Refinitiv Eikon database. The panel regression model was used to examine the relationships of variables studies. Findings – We find that ESG is negatively related to risks while ESG controversy is positively related to risks. This suggests that when firms engage in more ESG activities, stakeholders’ relationships are reinforced, and lead to reduced firm risks. Further, this study also finds that both Shariah screening and legal environment play significant moderating roles in reducing risks via their influence on ESG and ESG controversies. The evidence is consistent with the stipulation that Shariah-compliant firms are more inclined to engage in ESG activities. Originality/Value – This study is unique as it is an attempt to examine the moderating role of Shariah screening and legal system in influencing the impact of ESG and ESG controversies on firm risk. Practical Implications – The findings suggest engaging more aggressively in ESG activities can benefit from their risk mitigating effect. Further, the present evidence of the positive impact of Shariah screening in mitigating risk via ESG and corporate controversies. This evidence lends credibility for firms to be considered as Shariah-compliant.