Financial performance shortfall, ESG controversies, and ESG performance: Evidence from firms around the world

Firms search for new strategic actions when their financial performance falls below their aspired level. This study examines whether financial performance shortfalls motivate firms to undertake improved ESG practices, possibly to maintain future legitimacy. It also investigates whether ESG controversies mediate firms’ ESG decisions in such situations. It finds a strong positive influence of financial performance shortfall on firm's ESG performance. However, when such firms are constrained by high levels of ESG controversies, they are less likely to engage in higher ESG practices, although such controversies have positive mediating impact on the relationship between financial performance shortfalls and ESG performance.