The impact of economic policy uncertainty on sustainability (ESG) performance: the role of the firm life cycle

Abstract

PurposeThis study investigates the impact of economic policy uncertainty (EPU) on corporate sustainability [environmental, social and governance (ESG)] performance and aims to explore whether uncertainty-induced sustainability performance is influenced by the firm's life cycle (LC).Design/methodology/approachThe study uses data from European non-financial firms listed during the period from 2002 to 2022 to extend the nascent literature regarding EPU and sustainability performance while applying a dynamic panel data regression analysis (Generalized Method of Moments - GMM System) on 11,462 firm-year observations of 1,869 European firms.FindingsThe authors find overwhelming evidence that policy uncertainty affects the sustainability performance of European firms. The firms restrict their environmental and governance-related activities and address immediate issues to survive during periods of high EPU. Conversely, the firms increase their social engagements to decrease uncertainty-induced information asymmetry. The authors' results show that the intensity and type of sustainability performance are also influenced by the firm's LC. The results imply that board gender diversity (BGD) increases while power concentration with the chief executive officer (CEO) decreases sustainability performance.Practical implicationsThese findings have important implications for policymakers, potential investors, firm management and other stakeholders given the firms' access to resources and preferences to encounter uncertainty vary across different LC stages.Originality/valueTo the best of the authors' knowledge, this is the first study that investigates the role of the firm's LC in the relationship between policy uncertainty and sustainability performance in the European context.