Environmental Performance and Financial Performance: The Predominant Moderating Effect of ESG Controversies alongside Board Gender Diversity and Independence

This study investigates the relationship between environmental performance (EP) and financial performance (FP) using a longitudinal sample of Fortune 500 firms from 2004 to 2023. Employing a two-stage semiparametric generalized additive model with firm fixed effects and controls, we find a strong positive association between EP and market valuation, robust to endogeneity and heterogeneity concerns. However, this environmental premium is significantly weakened when firms face ESG controversies, highlighting the financial costs of reputational shocks. We further examine governance moderators and show that board gender diversity and independence both enhance the EP–FP linkage and reduce the adverse impact of controversies. When considered jointly, ESG controversies emerge as the most influential factor shaping the EP–FP nexus. Overall, our findings suggest that environmental initiatives deliver sustained market benefits only when coupled with sound governance and effective ESG risk management, underscoring key implications for managers and policymakers.