image: The graph illustrates the dynamic effects of the policy. The short line perpendicular to the horizontal axis in the graph shows the 95％ confidence interval of the regression coefficient. Current is 2016, post_1 is 2017， pre_2 is 2014, and so on. Since period pre_1 before the policy point in time is used as the benchmark group, data for period pre_1 are not available in the graph.
Credit: Zhifeng Dai and Qinnan Jiang (Changsha University of Science and Technology, China).
Background and Motivation
As global climate risks intensify, climate policy uncertainty (CPU) has emerged as a critical challenge for businesses worldwide. While environmental, social, and governance (ESG) performance has gained prominence as a driver of sustainable development and investment decisions, the relationship between CPU and corporate ESG strategies remains underexplored. This study addresses a key gap in the literature by investigating how rising CPU—driven by evolving climate policies—impacts ESG performance in Chinese listed companies. China Finance Review International (CFRI) is pleased to present the paper titled “Climate policy uncertainty and corporate ESG performance: evidence from Chinese listed companies”, which identifies actionable strategies for firms to mitigate risks and enhance resilience in a rapidly changing regulatory and environmental landscape.
Methodology and Scope
The study employs a robust panel regression analysis using data from 4,490 Chinese A-share listed companies across 12 industries from 2011 to 2022. To ensure reliability, researchers utilised advanced econometric techniques, including:
- Propensity Score Matching (PSM) to address selection bias.
- Two-Stage Least Squares (2SLS) and System Generalised Method of Moments (sys-GMM) to tackle endogeneity.
- Difference-in-Differences (DID) analysis leveraging the 2016 Paris Agreement as a policy shock.
Key Findings and Contributions
- Positive Link Between CPU and ESG Performance: Higher CPU levels are found to significantly enhance corporate ESG scores, particularly among non-state-owned enterprises (N-SOEs), companies in heavy-polluting industries, and firms operating in regions with stringent environmental regulations. Mechanism analysis indicates that firms with elevated systemic risk tend to exhibit more pronounced ESG improvements as a strategic risk-mitigation measure.
- Dimensional Variations in ESG Impact: CPU has the most pronounced positive impact on the environmental (E-score) and social (S-score) dimensions of ESG. However, governance (G-score) performance experiences a slight decline, which is a counterintuitive finding. This decline is attributed to short-term governance challenges that arise during periods of policy transition.
- Economic Consequences: The strategic ESG enhancements driven by CPU lead to tangible economic benefits. Specifically, they help reduce operational risks, such as return volatility, and significantly boost total factor productivity (TFP). These findings underscore the dual benefits of sustainability investments, highlighting how improved ESG performance can drive both environmental and economic gains.
Why It Matters
This research holds critical implications for stakeholders:
- For Governments: Highlights the need for tailored policies supporting ESG adoption, especially in vulnerable sectors. Stringent yet stable regulatory frameworks can amplify positive outcomes.
- For Businesses: Prioritises ESG integration as a strategic tool to navigate CPU, enhance reputational capital, and unlock long-term value. Non-state actors and polluting industries must act proactively to mitigate risks.
- For Investors: Emphasises ESG metrics as a hedge against climate-induced volatility, guiding portfolio decisions toward resilient firms.
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Journal
China Finance Review International
Method of Research
News article
Article Title
Climate policy uncertainty and corporate ESG performance: evidence from Chinese listed companies
Article Publication Date
11-Mar-2025