This study examines whether political instability influences corporate ESG (Environmental, Social, and Governance) performance by analyzing the effect of country-level political risk on firms' ESG outcomes. We further investigate how cash reserves, national cultural dimensions, and climate change adaptation capabilities moderate this relationship. Utilizing panel data from Refinitiv and the International Country Risk Guide (ICRG) across 31 countries (2002–2018) and employing fixed-effects regression as our primary methodology, we document three key findings: First, heightened political risk significantly reduces firms' ESG performance, a result robust to GMM estimation and instrumental variable techniques addressing endogeneity. Second, the adverse effect is attenuated in firms with limited cash holdings and in nations with advanced climate adaptation strategies. Third, national culture exhibits heterogeneous moderating effects. Our work extends the ESG literature by introducing political risk, measured through ICRG’s comprehensive framework, as a novel determinant in cross-national contexts, while offering actionable insights for policymakers and corporate stakeholders navigating politically volatile environments.
Lê et al. (Sun,) studied this question.