Climate Policy Uncertainty and Firm Performance Volatility: The Moderating Role of ESG in ASEAN-5 Countries

Abstract

Research Question: This study examines how global climate policy uncertainty (CPU) affects firm performance across regions. Motivation: ASEAN has undertaken various initiatives at the national, regional, and global levels to address climate change. However, climate risk mitigation policies often drive technological changes and accelerate the obsolescence of certain assets, potentially increasing firms’ performance volatility. Idea: This study investigates how CPU influences firms’ performance volatility and further explores the moderating role of Environmental, Social, and Governance (ESG) factors in this relationship. Additional tests based on firm size and market-to-book ratio are conducted to ensure the robustness of the results. Data: The sample consists of publicly listed firms from the ASEAN-5 countries (Indonesia, Malaysia, Singapore, Thailand, and the Philippines), covering the period from 2005 to 2024. Method/Tools: Firm performance volatility is measured using the standard deviation of accounting-based performance indicators (return on assets and return on equity) and earnings-based indicators (sales and profit margins). A fixed-effects panel regression model is employed for the analysis. Findings: The results show that the CPU index significantly increases firms’ performance volatility, indicating that higher fluctuations in CPU exacerbate performance instability. In other words, greater CPU volatility over time leads to greater uncertainty in firms’ performance outcomes. Surprisingly, ESG exhibits a significant positive moderating effect in this relationship, raising concerns about the effectiveness of sustainability practices in mitigating CPU-related risks. In particular, the social pillar appears insufficient in reducing the adverse effects of climate policy uncertainty. Additionally, the negative impact of CPU on firm risk is more pronounced among larger firms and those with lower growth prospects. Contributions: This study provides new insights into the impact of global CPU on firm performance in the ASEAN region, contributing to the literature that has predominantly focused on economic policy uncertainty (EPU).