Heightened geopolitical risk: Do firms shift focus to esg? Evidence from Asia

Abstract

In the period of rising geopolitical risk (GPR), ESG performance has become one of the biggest concerns among not only investors but also managers worldwide. In Asia, the possibility of massive wars is higher than ever, including the Israel–Hamas war and the possibility of erupting in the Korean War, which arouses concerns among society about whether they should deal with short-term benefits for survival or long-term ESG advancement. Therefore, does geopolitical uncertainty affect the ESG commitment of Asian firms? To address this question, the research aims to examine the nexus between Geopolitical risk and ESG performance of Asian firms. To address potential endogeneity, we employed the Two-Way Fixed Effect as well as the S-GMM estimation method. After collecting data from companies across 14 Asian countries from 2010 to 2023 with 12,122 firm-year observations, we found that geopolitical risk is positively associated with ESG performance, which is contrary to initial expectations and suggests that risks do not merely result in harm but can present opportunities for firms to adapt, innovate, and create values. Specifically, we also found that geopolitical risk impacts positively on the Environmental, Social, Governance pillar, highlighting firms’ ability to enhance sustainability and governance practices under external pressures. Additionally, we expanded our research alongside sub-sample tests including state-owned and non state-owned enterprise groups, high-low competitive company groups and high-low geopolitical risk enterprise groups. These findings reveal that state-owned enterprises, high competitive companies and high geopolitical risk groups are more likely to committee with ESG activities than others. Robustness tests and additional analysis (DID-PSM) also support our main findings, which highlight the role of geopolitical risk in enhancing ESG initiatives. To investigate channel analysis, we also examined the potential channel effects of cash holding and cost of capital, and discovered significant impacts. These findings bring valuable insights for investors to effectively execute ESG strategies as well as governments and policymakers in Asia to implement policies for strengthening ESG initiatives as a strategic response to uncertainty