Steering Through the Fog: The Impact of Firm-Level Uncertainty Perception on ESG Performance

Abstract

This study examines the impact of a firm-level perception of uncertainty on corporate Environmental, Social, and Governance (ESG) performance using a textual analysis approach. Based on data from China’s listed firms between 2010 and 2021, we find that a firm-level perception of uncertainty is positively associated with subsequent corporate ESG performance. In our heterogeneity analysis, we discover that this impact is more pronounced for state-owned enterprises, non-high-tech industries, and non-polluting sectors. Moreover, additional tests confirm that financial constraints, operational fees, and management fees significantly moderate this effect. Overall, we conclude that when there’s an increase in the perception of uncertainty at the firm level, firms tend to reduce their subsequent ESG investments and performance to mitigate potential operational risks in the future. These findings have significant implications, motivating enterprises to engage more in ESG practices.

Keywords: Firm-level perception of uncertainty, Textual analysis, ESG performance, Corporate finance