Do firms walk the talk when economic uncertainty is high?

The prevalence of decoupling has increased enormously, as has that of sustainable investments. For example, sustainable investments in the U.S. have expanded at a robust pace of 42.5%, growing from $12 trillion in 2018 to $17.1 trillion in 2020 – 33% of all professionally managed U.S. assets, clearly suggesting an ESG (environmental, social, governance) euphuism among U.S. investors. Stakeholder activism is the main reason behind the sustainability drive of firms. Scholars argue that such stakeholder influence may encourage firms to integrate CSR practices into their corporate processes or result in decoupling behavior. CSR decoupling can be defined as lack of alignment between CSR actions/performance and CSR communications/disclosure. For example, Volkswagen promoted its Jetta TDI as labelling “Clean Diesel” but later found guilty on installing cheat devices to manage emission tests.

Growing suspection towards CSR

Following the news of Volkswagen and British Petroleum’s involvement in decoupling practices, stakeholders including policymakers have become suspicious about the sustainable outlook of firms. Extant literature suggests that sustainability ratings, CSR reporting quality, and governance mechanisms deter CSR decoupling. It is also well documented that economic policy uncertainty (EPU) drives information asymmetry and firms use CSR communications/disclosure to reduce information asymmetry while seeking legitimacy from stakeholders, implying that firms may embrace decoupling (i.e., higher levels of disclosure than CSR performance) when uncertainty is high. We therefore argue that EPU not only magnifies the asymmetry of the limited information available in the market about firms; it also increases uncertainty and complexity in the corporate ecosystem and its regulatory frameworks that renders the stakeholders both less able and less willing to verify and hold the firms accountable for their CSR performance, thereby increasing the incentives to symbolic legitimacy and CSR decoupling. Alternatively, enhanced EPU may act as a disciplinary mechanism motivating the firms to initiate and disclose CSR to increase their reputation to hedge against increased uncertainty. Empirical evidence suggests that CSR-linked activities act as a hedge that can reduce a firm’s transaction cost and risk during periods of high uncertainty by enhancing its reputation. This suggests that CSR may be implemented in true essence when uncertainty is high.

Enhanced economic policy uncertainty may act as a disciplinary mechanism motivating the firms to initiate and disclose CSR to increase their reputation to hedge against increased uncertainty.

Using data of U.S. firms for the period 2002 to 2019, we begin by examining how EPU impacts on CSR decoupling. We then consider whether board gender diversity (BGD) moderates the relationship between EPU and CSR decoupling, as recent evidence shows that female directors decrease policy-induced uncertainty via their better monitoring. We make several contributions to the literature. First, we extend the EPU literature by pioneering the investigation of the EPU–CSR decoupling nexus. There is a positive association between EPU and CSR decoupling, which suggests that firms are more likely to decouple CSR performance from disclosure when economic uncertainty is high. EPU intensifies information asymmetry in the corporate ecosystem that render the stakeholders both less able and less willing to verify the CSR performance providing incentive for symbolic legitimacy to the firms. Therefore, firms disclose more to decrease this uncertainty-induced information asymmetry or enhance their actual CSR and its disclosure to hedge against increased uncertainty. Second, we document that female presence on corporate boards decreases CSR decoupling depending on EPU, thereby contributing to the CSR decoupling literature. CSR decoupling is considered an unethical practice, and female directors – being more ethical compared to their male counterparts – try to curb CSR decoupling. Third, we widen the scarce literature on CSR decoupling by documenting that when boards are gender-diverse, they moderate EPU’s destructive impact on CSR decoupling.

Methodology

Panel data regression techniques

Applications and beneficiaries

Our findings provide managers, regulators, and policymakers with a more nuanced understanding of the external drivers of CSR decoupling: Our results highlight that stakeholders need to be more vigilant about firms’ CSR claims when EPU is high.

Reference to the research

Qureshi, M. A., & Gull, A. A., Ahsan, T., Majeed, M. A. (2024). Do firms walk the talk when economic uncertainty is high?. Journal of Cleaner Production, 436(January), 140617.

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