The impact of ESG performance on financial risk: the moderating role of operational capability and profitability

Document Type : Research Paper

Authors

1 Prof., Department of Accounting and Auditing, Faculty of Accounting and Financial Sciences, College of Management, University of Tehran, Tehran, Iran

2 MSc. Student ,Department of Accounting and Auditing, Faculty of Accounting and Financial Sciences, College of Management, University of Tehran, Tehran, Iran

3 Ph.D Candidate ,Department of Accounting and Auditing, Faculty of Accounting and Financial Sciences, College of Management, University of Tehran, Tehran, Iran

Abstract

This study investigates the effect of environmental, social, and governance (ESG) performance on corporate financial risk, with a particular focus on the moderating roles of operational capability and profitability in the Iranian capital market. Although ESG has become a key criterion for evaluating corporate transparency and accountability, prior empirical evidence regarding its impact on financial risk remains inconclusive, particularly in emerging markets characterized by distinct institutional conditions and firm-specific characteristics. Using panel data from 263 firms listed on the Tehran Stock Exchange during 2020–2024, the hypotheses were tested through multivariate regression models with year and industry fixed effects and clustered robust standard errors. In addition, robustness tests and the two-stage least squares (2SLS) method were employed to address potential endogeneity and reverse causality concerns. The findings indicate that ESG performance has a positive and statistically significant effect on financial risk. The results further show that operational capability significantly weakens the positive relationship between ESG and financial risk. In contrast, although profitability initially intensified the positive effect of ESG on financial risk, this moderating effect did not remain statistically robust after controlling for endogeneity through the 2SLS model. Overall, the findings suggest that the financial consequences of ESG in the Iranian capital market may depend more on firms’ operational capability and institutional conditions than solely on their financial resources.

Keywords

Main Subjects

References

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Journal of Accounting Advances
Volume 18, Issue 1
September 2026
Pages 353-386

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  • Receive Date: 26 November 2025
  • Revise Date: 28 May 2026
  • Accept Date: 03 June 2026

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