Navigating Economic Policy Uncertainty: The Role of ESG Performance in Mitigating the Risk of Nonfinancial Firms in China

ABSTRACT Amid rising economic policy uncertainty (EPU) and escalating financial risks facing nonfinancial firms in China, this study investigates the impact of EPU on firm‐level risk exposure, with a particular focus on the moderating role of environmental, social, and governance(ESG) performance. Using panel data from nonfinancial firms listed on China's A‐share market between 2011 and 2020, the empirical analysis finds that higher levels of EPU significantly increase both systematic and idiosyncratic risks. Importantly, stronger ESG performance mitigates the positive relationship between EPU and firm risk, underscoring ESG as a strategic buffer in periods of heightened policy uncertainty and reflecting the broader interaction between corporate governance and China's political‐economic environment. Further analysis reveals heterogeneity in this moderating effect: ESG performance plays a more pronounced role in firms that are highly sensitive to policy changes or located in regions with higher levels of marketization. These findings remain robust across various model specifications and endogeneity checks, highlighting the strategic value of ESG in managing policy‐induced risks within China's evolving institutional landscape.