Political risk and ESG performance: the moderating role of green innovation

Purpose This study aims to examine how firm-level political risk (Prisk) affects environmental, social and governance performance (ESGPerf) and whether green innovation (GIN) moderates this effect. Design/methodology/approach This study applies a two-way fixed-effects model that controls for differences across individuals and time periods for a sample of 2,190 nonfinancial firms-year observations from Standard and Poor’s 500 index over the 2014–2023 period. Findings Results show that higher Prisk is associated with stronger ESGPerf, suggesting that firms respond to political uncertainty by investing more in ESG initiatives to enhance their legitimacy and stakeholders’ trust. Additionally, GIN positively moderates the Prisk–ESGPerf link, indicating that innovative firms are better positioned to transform political challenges into opportunities for sustainable strategic development. These results are robust to several rigorous checks. Practical implications This study provides empirical evidence on how ESG-themed expectations and GIN engagement can strategically construct corporate legitimacy by supporting sustainable business practices that meet stakeholder expectations. Originality/value This study establishes a robust theoretical and empirical foundation for examining the extent to which GIN matters for the Prisk-ESGPerf association. It contributes to the current discussion on Prisk and ESGPerf and has implications for researchers, business practices and regulatory issues.