Corporate Environmental, Social, and Governance Performance Under Economic Policy Uncertainty: International Evidence

Abstract

This study finds that economic policy uncertainty (EPU) has different impacts on different categories of corporate environmental, social, and governance (ESG) performance. EPU increases corporate governance quality, suggesting that good governance may serve as a hedge against adverse shocks. However, EPU reduces environmental and social engagement due to 1) a higher precautionary savings motive under higher risk; 2) a higher valuation of the option to delay irreversible spending on outside stakeholders in a riskier environment. The results are robust to subsample analysis and an alternative EPU measure. IV regressions based on senate polarization strengthen the identification.

Keywords: Economic Policy Uncertainty, Corporate Social Responsibility, Cash Holdings, Precautionary Savings, Real Options

JEL Classification: D80, E66, G18, G30, M14