Do ESG controversies moderate the relationship between CSR and corporate financial performance in oil and gas firms?

The study addresses how Environmental, Social, and Governance (ESG) factors relate to Corporate Financial Performance (CFP) in the oil and gas (O&G) industry, and whether ESG controversies (ESGC)—negative events reported in global media—moderate this relationship. Given the sector’s significant environmental and social impacts and increasing scrutiny from stakeholders and regulators, firms’ CSR/ESG practices are integral to market valuation. Drawing on stakeholder and legitimacy theories, the authors outline two research questions: (1) To what extent do ESG factors affect CFP in O&G firms? (2) Do ESG controversies influence (moderate) the relationship between ESG factors and CFP? The study focuses on a global sample of O&G firms to provide a comprehensive view beyond prior research that often examines only risk or single ESG dimensions.

The literature review examines the ESG–CFP nexus and the role of ESG controversies. Environmental practices can yield cost reductions, risk mitigation, reputation benefits, and access to markets, though prior empirical results are mixed across sectors. The authors posit Hypothesis 1: the environmental factor positively impacts CFP. The social factor (workforce practices, human rights, community, product responsibility) may enhance access to finance, innovation, competitive advantage, and reputation; thus Hypothesis 2: the social factor positively impacts CFP. Governance (board independence, transparency, shareholder protection, diversity) is theorized to improve trust, reduce information asymmetry, and enhance performance; thus Hypothesis 3: the governance factor positively impacts CFP. ESG controversies—non-ethical events (e.g., environmental harm, labor issues, bribery)—can deteriorate reputation, increase risk and costs, and reduce firm value. The authors propose that ESGC weaken the positive ESG–CFP relationship: Hypotheses 4a–4c: ESGC moderate the relationships between environmental/social/governance factors and CFP, respectively, weakening them as controversies rise.

Design: Composite-based structural equation modeling (PLS-SEM) using SmartPLS 3.3.3 was employed, appropriate for emergent (forged) constructs and formative indicators. The two-stage approach was used to model moderation with formative exogenous variables. Sample and data: 264 global oil and gas firms from Refinitiv Eikon. ESGC measured in 2018; ESG pillar indicators and CFP measured in 2019, lagging controversies by one year to allow effect transmission. Constructs: Five constructs—exogenous: Environmental (E), Social (S), Governance (G) (each formative), ESGC (single-item); endogenous: CFP (formative). Indicators (0–100 scores per Refinitiv methodology): E: emissions (E1), resource use (E2), environmental innovation (E3). S: workforce (S1), human rights (S2), community (S3), product responsibility (S4). G: management/board governance (G1), shareholder relations (G2), CSR strategy (G3). ESGC: Refinitiv ESG Controversies percentile score (0–100) adjusted for size and severity across 23 topics. CFP: market-based valuation indicators—share price (P), Tobin’s Q, market value of the company (logMVC). Descriptives indicate high average ESGC (mean 90.64), consistent with the O&G industry’s controversial nature. Models: Model 1 (main effects): CFP2019 = β0 + β1 E2019 + β2 S2019 + β3 G2019 + β4 ESGC2018 + ε. Model 2 (moderation): adds interaction terms separately—E*ESGC, S*ESGC, G*ESGC—using the two-stage approach. Measurement model assessed via VIF (threshold 3.3) and indicator weight significance using bootstrapping (10,000 resamples, 5% level). Structural model assessed via path significance, R², f², Q², and goodness of fit (SRMR, dULS, dG) with bootstrap-based exact fit tests.

Measurement model: Formative indicators mostly significant. Environmental: emissions (weight 0.703, p<0.001) and resource use (0.401, p<0.001) significant; environmental innovation not significant. Social: workforce (0.555, p<0.001), product responsibility (0.463, p<0.001), community (0.176, p=0.049) significant; human rights not significant. Governance: CSR strategy (0.813, p<0.001) and board management (0.409, p=0.001) significant; shareholder relations not significant. CFP: logMVC significant (weight 1.001, p<0.001); price and Tobin’s Q weights not significant in the formative construct. Model 1 (main effects; R²=0.388): - Environmental → CFP: path 0.224, p=0.010 (positive, significant). Supports H1. - Social → CFP: path 0.309, p=0.001 (positive, significant). Supports H2. - Governance → CFP: path 0.063, p=0.156 (not significant). H3 not supported. - ESGC → CFP: path -0.170, p=0.000 (negative, significant). Supports adverse effect of controversies. Effect sizes f²: ESGC 0.042; Environmental 0.026; Social 0.057; Governance 0.004. Q² > 0 for endogenous variables. Goodness of fit: SRMR 0.044 (<0.08); bootstrap-based dULS and dG indicate good fit. Model 2 (with moderation; R²=0.398): - E×ESGC → CFP: path -0.102, p=0.015 (significant negative moderation). Supports H4a. - S×ESGC → CFP: path -0.109, p=0.010 (significant negative moderation). Supports H4b. - G×ESGC → CFP: path -0.068, p=0.076 (not significant). H4c not supported. Conditional effects (at ESGC levels): - Environmental → CFP: 0.34 at -1 SD ESGC; 0.23 at mean; 0.13 at +1 SD (all p≤0.015). - Social → CFP: 0.43 at -1 SD; 0.32 at mean; 0.21 at +1 SD (p≤0.010 at low/high; p<0.001 at mean). - Governance → CFP: nonsignificant across ESGC levels. Additional reported effect: a one standard deviation increase in ESGC reduced the E→CFP and S→CFP relationships by approximately 16.26% and 52%, respectively. Overall, higher ESGC levels weaken the positive impact of environmental and social pillars on CFP, and ESGC directly harms CFP.

Findings indicate that in the O&G sector, environmental and social performance are rewarded by financial markets and positively associated with market-based CFP, while governance, as operationalized here, does not significantly influence CFP. ESG controversies both directly reduce CFP and attenuate the benefits of environmental and social initiatives, consistent with legitimacy concerns and stakeholder reactions to negative events. The sector’s high environmental and social risk profile likely drives investor focus on E and S over G factors. Results align with prior evidence that controversies increase volatility and undermine reputation, and that robust ESG activities can mitigate—but not eliminate—these adverse effects. The moderation analysis clarifies that lower levels of controversies strengthen the E/S–CFP links, whereas higher controversy exposure weakens them.

This paper shows that for 264 global oil and gas firms, environmental and social pillars of ESG are positively related to corporate financial performance, but governance is not. ESG controversies not only negatively affect CFP directly, they also significantly weaken the positive effects of environmental and social factors on CFP; no significant moderation is observed for governance. The study contributes to ESG literature by quantifying the moderating role of controversies in a highly scrutinized industry and reinforces calls for responsible practices to enhance market valuation. Future research should refine governance measures by sector context, explore heterogeneous regulatory environments, and assess the temporal persistence of controversy impacts using longer panels.

- International sample with varying regulatory contexts; effects of controversies may differ across countries and regimes. - Controversy effects are lagged one year; the duration and decay of impacts over longer horizons are not identified. - Governance construct may not capture all governance dimensions salient to O&G investors; sector-specific measures could yield different results. - Market-based CFP indicators dominate the formative CFP construct, potentially underweighting accounting performance dimensions.