Monetary policy uncertainty and ESG performance across energy firms

Abstract

This study investigates the relationship between monetary policy uncertainty and the Environmental, Social, and Governance (ESG) performance of energy firms. For empirical analysis this study used unbalanced panel data of 3991 firm-year observations from 35 countries covering the period from 2002 to 2021. Utilizing the Shadow Short Rate as a proxy for monetary policy uncertainty, our baseline results reveal a consistent negative association between uncertainty and ESG performance within the energy sector. To address endogeneity concerns, two-step system GMM, 2SLS, and PSM were employed. The channel analysis on the interaction between monetary policy uncertainty and eco-friendly practices indicated a positive association between the interaction and energy firms' ESG performance. Thus, strategic alignment with sustainability goals is crucial for mitigating the adverse impacts of monetary policy uncertainty and ensuring long-term ESG performance of energy firms. Policy implications suggest that regulators can contribute to economic stability by reducing uncertainty, while policymakers can incentivize sustainable practices.