Pivoting to Avoid Pitfalls: Trade Policy Uncertainty and Corporate ESG Performance

Abstract

In the context of the U.S.-China trade war, this study constructed a corporate trade policy uncertainty index through text analysis and found that rising trade policy uncertainty significantly improves corporate ESG performance. Mechanism analyses show that trade policy uncertainty promotes corporate ESG performance through a risk-reducing channel, which has increased operational risks and dampened managers' optimistic expectations. Heterogeneity analyses find that the positive effect is more pronounced in target industries subject to tariff escalations of trade wars, non-state-owned enterprises and firms with lower foreign shareholdings. Tests of economic consequences show that better ESG performance positively affects market value during periods of high trade policy uncertainty while having little impact on financial performance. We further find that the promoting effect of trade policy uncertainty on ESG performance only persisted for 2 years, indicating that social responsibility activities compelled by export pressures manifest more as a short-term strategy with insurance value. Our findings support the view that ESG acts as a nonmarket strategy to mitigate negative external shocks.