Impact of ESG performance on financial risk in energy firms: evidence from developing countries

Purpose This study aims to examine the impact of ESG performance on financial risk (FR) in energy firms from developing countries. It also explores the moderating roles of ESG controversies and board gender diversity (BGD) on this relationship. Design/methodology/approach The research uses a panel data set of 218 energy firms from 20 developing countries from 2019 to 2024, using two-stage least squares regression to address potential endogeneity. Robustness checks are conducted using fixed-effects estimation and pooled ordinary least squares. Findings The results indicate that superior ESG performance significantly reduces both total and systemic risk. ESG controversies positively moderate the relationship between ESG performance and FR, suggesting that controversies may weaken the risk-reducing benefits of strong ESG practices. Additionally, BGD significantly strengthens the negative relationship between ESG performance and FR. Robustness checks confirm the consistency of these findings across different estimation methods. Originality/value This study contributes to the growing body of literature by examining the role of ESG performance in FR mitigation, specifically within the energy sector in developing countries. To the best of the authors’ knowledge, this is the first research to explore these dynamics in this specific context. This study uniquely illustrates how ESG controversies and BGD significantly moderate the ESG–risk relationship, offering fresh insights that extend stakeholder, risk management and legitimacy theories. The findings highlight the importance of integrating ESG factors into corporate governance and risk management, particularly for firms operating in high-risk, high-impact industries such as energy.