ESG and Financial Distress: Exploring the Moderating Role of ESG Controversy
DOI:
https://doi.org/10.54392/ajir25420Keywords:
Financial Distress, ESG, Environmental Performance, Social Performance, ESG Controversy, ASEAN 5Abstract
This research investigates how ESG Performance affects the financial distress in several selected non-financial companies in five ASEAN countries, as well as views whether the ESG Controversies moderates these effects. The fixed effect analysis was conducted with 2342 observation samples (an unbalanced panel data of 589 firms for the 2014-2024 period). The financial distress was operationalized through the Altman Z-Score, and the ESG performance, with the controversy data sourced from the London Stock Exchange Group (LSEG) data repository. The results reveal that Environmental, Social, and Governance performance do not exert a meaningful impact on Financial Distress. Furthermore, the moderating variable, ESG Controversy, strengthens the impact of environmental and social performance, amplifying their adverse effect with statistical significant effect. The results imply that the external pressure drives the ESG improvement that reduces the financial distress risk. It is worth noting that there is no significant interaction between the governance performance and the notion that governance is "soft information" whose impact becomes more pronounced over time. Additionally, this research demonstrates that ESG performance is only useful when reputation is at risk and that company size, profitability, and liquidity remain important determinants impacting financial distress. This examine provides to what we understand about sustainability and financial distress through focusing on how ESG problems trade over the years, especially in ASEAN countries wherein ESG adoption remains voluntary. Company management, buyers, and regulators must all consider those effects after they build risk assesment frameworks that take ESG controversies under consideration.
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Copyright (c) 2025 Muhammad August Maulana, Herlin Tundjung Setijaningsih, Rindang Widuri (Author)
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