The nonlinear impact of trade policy uncertainty on corporate ESG performance

Abstract

This study explores how trade policy uncertainty (TPU) affects corporate environmental, social, and governance (ESG) performance by analyzing panel data on publicly listed firms. The findings reveal that TPU exhibits a significant inverted U-shaped relationship with ESG scores, indicating that moderate uncertainty encourages sustainability engagement, while extreme policy volatility restrains such investments. To strengthen the causal interpretation of these results, the study employs two-stage least squares, propensity score matching, and Heckman procedures, all of which corroborate the nonlinear TPU–ESG linkage. Further analysis shows that supply chain resilience partially mediates this relationship, suggesting that firms facing higher TPU bolster their operational adaptability, thereby improving ESG outcomes. The moderating effect of executive risk preference is also confirmed, implying that risk-averse leadership amplifies the positive effect of TPU on ESG at moderate levels but intensifies the decline once uncertainty passes a critical threshold. Heterogeneity analysis reveals important institutional differences, with non-state-owned enterprises demonstrating greater sensitivity to uncertainty changes than state-owned firms, while firm life-cycle analysis shows declining firms exhibit the most extreme responses to TPU variations. These findings contribute to the literature on policy uncertainty and corporate sustainability by highlighting both the potential and the perils of uncertain trade environments. Managerial and policy implications include the importance of resilience-building strategies, adaptive leadership traits, and context-specific approaches for sustaining ESG performance under volatile external conditions.