Sustainability assurance under ESG controversies: the role of governance mechanisms

Abstract

This study aims to explore the impact of environmental, social and governance (ESG) controversies on firms’ decisions to obtain external assurance for sustainability reports. It also examines the moderating role of sustainability governance mechanisms, namely, the presence of a sustainability committee and a chief sustainability officer (CSO). Panel logit regressions are estimated using an unbalanced panel of 11,550 firm-year observations from 1,952 listed financial and nonfinancial firms across four European countries – Italy, France, Germany and Sweden – over the period 2017–2023. Data are primarily sourced from Refinitiv Eikon and complemented by manual data collection. The dependent variable captures the voluntary adoption of sustainability assurance, whereas the key explanatory variables relate to ESG controversies and governance characteristics. The results indicate that firms exposed to ESG controversies – capturing negative ESG events reported in the media – are generally less likely to adopt external assurance. However, this negative association is mitigated by sustainability governance structures, as the presence of a CSO and/or sustainability committee strengthens firms’ commitment to sustainability and increases the likelihood of engaging external assurance when firms are exposed to ESG controversies that may affect their legitimacy. This study contributes to the literature by elucidating the role of ESG controversies in hindering sustainability assurance and highlighting the importance of corporate governance mechanisms in shaping firms’ sustainability-related responses to reputational and legitimacy challenges.