Economic policy uncertainty, stakeholder engagement, and environmental, social, and governance practices: The moderating effect of competition

Abstract

his paper investigates the effect of the economic policy uncertainty (EPU) on corporate environmental, social, and governance practices (ESG), using 6,562 firm-year observations from 15 developed European countries covering the period from 2004 to 2017. The results show that during periods of high uncertainty, firms increase their overall ESG performance, corporate environmental performance, and performance in governance. The relationship is valid for emission, resource use, workforce, management, and corporate social responsibility (CSR) strategy subdimensions of ESG. Furthermore, during periods of high uncertainty, firms operating in concentrated industries increase their overall ESG activities and corporate environmental performance. These results suggest that firms use ESG practices as risk-reducing activities like insurance, during high periods of uncertainty. Overall, consistent with the stakeholder theory, the results indicate that firms increase their ESG practices not only to reduce corporate risk-taking but also to follow value-increasing activities during periods of high uncertainty, implying an improved stakeholder engagement.