ESG Controversies and Firm Performance: The Moderating Role of Board Characteristics and ESG Practices Using a NARDL Approach

ABSTRACT This study investigates the dynamic relationship between ESG controversies and firm financial performance in the French institutional context, while examining the moderating role of board characteristics and ESG practices. Using a panel of 82 non‐financial French listed firms over 2012–2021, we combine OLS and NARDL estimations to capture short‐ and long‐run dynamics. Results show that ESG controversies negatively affect accounting performance (ROA and ROE) in the short run, reflecting immediate reputational and operational costs. In contrast, Tobin's Q reacts positively in the long run, suggesting that markets can anticipate governance adjustments and enhanced transparency. Wald symmetry tests suggest that the effects of positive and negative ESG controversy shocks are predominantly symmetric in both the short and long run. Board size amplifies the negative impact of controversies, while gender diversity does not systematically mitigate crisis effects. ESG practices improve performance under normal conditions; however, their benefits weaken significantly in the presence of controversies. The negative interaction between ESG practices and ESG controversies suggests a credibility gap consistent with greenwashing, where high ESG disclosure combined with repeated controversies erodes stakeholder trust and financial performance. Overall, the findings highlight the importance of effective governance structures in managing ESG‐related risks and demonstrate the value of flexible dynamic modeling in ESG–performance analysis. Theoretically, this study contributes to stakeholder, agency, and signaling theories by highlighting the dynamic and conditional nature of ESG–performance relationships, particularly under reputational shocks. From a practical perspective, corporate boards should prioritize substantive governance reforms and credible ESG integration rather than symbolic disclosure, while regulators and investors are encouraged to treat ESG controversies as a distinct and forward‐looking risk indicator, complementing traditional ESG ratings in assessing firm resilience and long‐term value creation.