Political uncertainty, climate risk, and ESG (Environmental, Social, and Governance) performance: International evidence

Abstract

This study examines whether country-level political risk influences corporate ESG (Environmental, Social, and Governance) performance. We further explore how cash reserves, national cultural dimensions, and climate change adaptation capabilities moderate this relationship. Utilizing panel data from Refinitiv and the International Country Risk Guide (ICRG) across 31 countries between 2002 and 2018, and employing fixed-effects regression, we document three key findings: First, heightened political risk significantly reduces firms’ ESG performance. The findings are robust to GMM estimation and instrumental variable techniques that address endogeneity. Second, this adverse effect is mitigated in firms with lower cash reserves and in countries with more advanced climate adaptation strategies. Third, national culture exhibits heterogeneous moderating effects. Our study extends the ESG literature by introducing political risk, measured using ICRG’s comprehensive framework, as a novel determinant in cross-national contexts, offering actionable insights for policymakers and corporate stakeholders operating in politically volatile environments.