Board oversight emerges as the strongest lever for ESG risk outcomes in non-financial firms

When a company stumbles on environmental, social, or governance issues, the damage rarely stays contained. Reputation erodes, trust in the brand weakens, and competitors gain ground. Yet for most non-financial firms, the internal machinery that is supposed to catch these risks before they escalate remains fragmented, reactive, and far less mature than the frameworks banks have spent decades building under regulatory pressure. A new study from Slovenia and Croatia argues that this gap is not inevitable, and that the practices banks developed under supervision can be selectively adapted by ordinary companies, with measurable benefits for how managers perceive their organization’s stability and resilience.

The research, published in Frontiers in Sustainability by Vita Jagrič of the University of Maribor, Dijana Oreški of the University of Zagreb, and Polona Tominc and Maja Rožman of the University of Maribor, set out to answer a deceptively simple question: does structured ESG risk governance actually relate to favorable organizational outcomes in non-financial firms? The answer, based on a survey of 114 medium-sized and large companies, is a qualified yes, and the strength of the relationship depends on which dimension of governance a firm prioritizes.

The study rests on a theoretical foundation drawn from institutional theory, stakeholder theory, and knowledge-transfer perspectives. Institutional theory explains why practices diffuse across organizational fields: coercive pressures from regulation, normative pressures from professional standards, and mimetic pressures through which uncertain firms emulate organizations perceived as more advanced. Banks, operating under detailed European Banking Authority guidelines on ESG risk management, have institutionalized structured approaches earlier and more comprehensively than firms in less-regulated sectors. The researchers argue that non-financial firms facing growing but less codified ESG expectations may emulate these mature practices to reduce uncertainty and enhance legitimacy, adapting them selectively rather than replicating them wholesale.

To ground this argument in practice, the team conducted a structured document-based benchmark of two major Slovenian banks, Nova Ljubljanska Banka and OTP Banka, reviewing publicly available sustainability strategies, Pillar III disclosures, governance information, and external ESG assessments published between 2021 and 2025. The benchmark revealed how banks treat ESG risks not as a new risk category but as an aggravating factor for risks they already manage. NLB, for example, monitors climate risk factors through traditional categories such as credit, market, liquidity, operational, and reputational risk, using transmission channels that link environmental drivers to financial exposures. The bank maintains a four-level sustainability governance structure, integrates environmental and social risks into its risk appetite statement, runs its own ESG stress-testing concept, and operates a three-level internal control system spanning business units, the risk management function, compliance, and independent internal audit. In 2024, Sustainalytics rated NLB’s ESG risk management as strong, scoring 96.2 out of 100.

These banking practices served as contextual illustrations rather than empirical comparison groups. The actual hypothesis testing came from a survey administered online between April and May 2026 to 350 randomly selected medium-sized and large non-financial firms in Slovenia and Croatia, identified from national registers of annual financial statements. After excluding incomplete responses, 114 valid responses remained, a response rate of 32.6 percent. Respondents were senior informants with direct knowledge of their firm’s risk management and ESG practices, including risk managers, chief financial officers, and members of senior management. The sample skewed toward manufacturing, which accounted for 38.6 percent of firms, followed by trade at 24.6 percent, with 58.8 percent classified as medium-sized enterprises under EU criteria.

The researchers conceptualized ESG risk governance through three distinct dimensions, each measured with four survey items on a five-point Likert scale. Environmental risk governance and integration captured whether environmental risks are formally incorporated into enterprise risk management frameworks, whether structured identification and assessment procedures exist, whether indicators monitor exposure, and whether assessments influence strategic planning. Social risk governance and integration addressed the integration of social and stakeholder-related risks into formal processes, structured policies, senior management review, and reporting mechanisms. ESG risk governance and oversight measured the clarity of assigned ESG responsibilities, board or top management oversight, embedding of ESG risks within internal control and compliance systems, and adherence to defined governance procedures. The outcome construct, perceived ESG-related organizational outcomes, reflected managers’ assessments of effective integration, organizational stability, long-term strategic resilience, and overall performance.

The relationships were assessed using partial least squares structural equation modeling, implemented in WarpPLS software. The measurement model demonstrated strong psychometric properties, with all indicator loadings exceeding 0.700, Cronbach’s alpha values ranging from 0.841 to 0.879, composite reliability between 0.893 and 0.914, and average variance extracted from 0.661 to 0.724, all above recommended thresholds. Discriminant validity was confirmed through heterotrait-monotrait ratios below 0.85 and the Fornell-Larcker criterion. Common method bias, a concern given the single-respondent design, was assessed using full-collinearity variance inflation factors, which ranged from 1.731 to 1.928, well below the conservative threshold of 3.3, and Harman’s single-factor test, in which the first unrotated factor accounted for 38.637 percent of variance, below the 50 percent criterion.

The structural results supported all three hypothesized relationships and revealed a clear ordering. ESG risk governance and oversight showed the strongest association with perceived organizational outcomes, with a standardized path coefficient of 0.402 and a large effect size of 0.372. Environmental risk governance and integration followed at 0.360 with an effect size of 0.241, while social risk governance and integration showed a comparatively moderate but still significant association at 0.289 with an effect size of 0.164. Together, the three dimensions explained 58.6 percent of the variance in perceived ESG-related organizational outcomes, with a predictive relevance coefficient of 0.421 confirming adequate predictive capability.

Robustness checks strengthened confidence in these findings. Adding firm size, country, and industry controls produced only minor changes in path coefficients, with none of the control variables reaching statistical significance, and explained variance increasing modestly from 0.586 to 0.618. A multi-group comparison found no statistically significant differences between Croatian and Slovenian subsamples, with oversight remaining the strongest predictor in both countries. An endogeneity assessment using stochastic instrumental variables detected no statistical evidence that the estimated relationships were materially affected by omitted variables, simultaneity, or reverse causality, though the researchers caution that this diagnostic cannot establish causal identification in a cross-sectional design.

The practical implications are direct. Non-financial firms seeking stronger ESG outcomes should prioritize board-level oversight, clearly assigned ESG responsibilities, formal integration of ESG risks into enterprise risk management, and systematic monitoring and reporting. The researchers suggest establishing dedicated ESG oversight committees, integrating ESG risk metrics into executive performance evaluation, and embedding ESG considerations into strategic planning and capital allocation. Governance, in this view, is not merely one ESG pillar among others but the structural architecture through which environmental and social risk practices become coordinated and operationalized. The findings also carry implications for policymakers, suggesting that regulatory emphasis on governance structures can catalyze more consistent and strategically embedded ESG implementation across industries, reducing fragmentation in sustainability practices and improving comparability across firms and sectors.

The study acknowledges limitations that temper interpretation. The cross-sectional, single-respondent design limits causal inference, and the outcome construct reflects managerial perceptions rather than externally verified ESG ratings or objective performance indicators. The sample of 114 firms, while adequate for the model estimated, is confined to two Central and Eastern European economies sharing a comparable post-transition institutional heritage, and generalization to other contexts should proceed with caution. Future research, the authors suggest, should employ longitudinal and multi-source data, combine survey responses with archival financial data and third-party ESG ratings, and examine whether the relative importance of environmental, social, and governance dimensions varies across institutional settings. For now, the message for managers is clear: fragmented, compliance-driven sustainability initiatives are unlikely to deliver the organizational benefits that structured, governance-anchored ESG risk management appears to support.

Subject of Research: ESG risk governance and perceived organizational outcomes in non-financial firms in Slovenia and Croatia

Article Title: From banking-sector benchmarks to non-financial firms: ESG risk governance and perceived organizational outcomes in Slovenia and Croatia

Article References: Jagrič, V., Oreški, D., Tominc, P., & Rožman, M. (2026). From banking-sector benchmarks to non-financial firms: ESG risk governance and perceived organizational outcomes in Slovenia and Croatia. Frontiers in Sustainability, 7, Article 1965019. https://doi.org/10.3389/frsus.2026.1965019

Image Credits: AI Generated

DOI: 10.3389/frsus.2026.1965019

Keywords: ESG, risk governance, enterprise risk management, Slovenia, Croatia, PLS-SEM, sustainability, banking-sector, benchmarks, non-financial, firms, risk