<p>Drawing on institutional and stakeholder theories, the objective of this study is twofold: first, to test the associations between country-level environmental degradation and firm-level corporate ESG performance; second, to investigate whether ESG engagement contributes to the financial stability of the energy sector. The data for 4537 observations were retrieved for the years between 2002 and 2021 from various sources, and fixed effects and two-stage least squares (2SLS) regression analyses were used. The study revealed that the environmental degradation proxied by the ecological footprint has a negative association with ESG performance and the environmental performance of energy firms. This finding confirms the institutional theory that the institutional environment matters for firms’ ESG initiatives; a degraded environment discourages firms from engaging with ESG performance and ecological commitment. Moreover, an inverted U-shaped relationship is identified between the ESG performance of firms and financial stability. As energy firms exhibit less environmental sensitivity in countries with a large ecological footprint, the results suggest practical implications for regulatory bodies. They can formulate and implement effective policies to mitigate the environmental impact of individuals and organizations. For instance, governments might enact policy changes aimed at reducing consumer consumption and waste. Imposing consumer or environmental taxes could be one such approach. Additionally, encouraging firms and individuals to sort waste, recycle, and use recyclable materials could help lower their ecological footprint.</p>