ABSTRACT This study examines how environmental regulations influence ESG controversies, with climate governance as a moderating factor and environmental decoupling as a mediating mechanism. Using 5110 firm‐year observations from European‐listed firms in the STOXX Europe 600 index between 2010 and 2024, our analyses yield three main findings. First, stringent environmental regulations significantly reduce ESG controversies by increasing compliance pressure, discouraging violations, and mitigating stakeholder skepticism. Second, environmental regulations reduce environmental decoupling, which in turn influences the extent of ESG controversies. This indicates that environmental decoupling mediates the relationship between environmental regulation and controversies, as firms may use it to obscure gaps between reported and actual performance, lowering external scrutiny. Finally, strong climate governance supports regulatory compliance, mitigates ESG controversies, and provides safeguards during adverse events. Robustness checks confirm the stability of the results. These findings offer practical implications for scholars, policymakers, and regulators aiming to strengthen corporate accountability and transparency.
Muhammad et al. (Sun,) studied this question.
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