Abstract

This study investigates the association between Environmental, Social, and Governance (ESG) performance and corporate tax avoidance, specifically aiming to reconcile mixed findings in prior literature. Using a sample of 3,528 firm－year observations listed on the KOSPI market from 2012 to 2024, we employ ESG ratings from the Korea Institute of Corporate Governance and Sustainability (KCGS) and multiple tax avoidance measures, including GAAP ETR, Cash ETR, and discretionary book－tax differences. We find a significant positive association between ESG performance and tax avoidance；firms with superior ESG ratings exhibit lower effective tax rates and higher discretionary book－tax differences. This relationship is consistent across individual environmental, social, and governance pillars and remains robust after controlling for endogeneity using Two－Stage Least Squares (2SLS) regression. Notably, this substitutive relationship is more pronounced after 2020, a period of expanded ESG management. Our findings support the risk management theory and the opportunistic reporting hypothesis, suggesting that firms strategically utilize ESG activities to offset the reputational risks associated with aggressive tax avoidance (i.e., greenwashing). These results imply that regulators, rating agencies, and investors should scrutinize the strategic motives behind ESG engagement rather than relying solely on ESG ratings.

Keywords

• ESG
• CSR
• Sustainability
• Tax Avoidance
• Tax Planning

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