Sustainability governance and financial performance in digital firms: the roles of environmental innovation and ESG controversies

Using a panel of the top 100 global digital companies over 2010–2022, this study examines a second-stage moderated-mediation model linking sustainability governance to financial performance through environmental innovation, conditional on ESG controversies. The hypotheses are tested using the Baron and Kenny procedure, structural equation modelling and non-parametric bootstrap resampling. The results show that all three sustainability governance mechanisms positively influence environmental innovation, with the sustainability committee emerging as the most robust driver. However, its financial effects vary across performance measures and levels of ESG controversy. Environmental innovation is associated with a market-to-book penalty at low controversy levels, which disappears as controversy exposure increases. Conversely, its effect on ROA becomes positive at high controversy levels, while no mediated effect is found for ROIC. Overall, environmental innovation appears to function less as an unconditional value signal than as a risk-management instrument whose financial value increases with reputational risks.