Environmental Performance Drivers: A Political Cost Approach

ABSTRACT We contribute to the business strategy and the environment literature by examining the effect of political cost pressures on corporate environmental performance in the context of United Kingdom‐listed firms. Drawing on a sample of non‐financial firms from the FTSE All‐Share Index over a period of 10 years (2013–2022), we construct novel indices of political cost pressures, regulatory compliance, penalties and fines, strategic and risk management and market/social expectations, using textual analysis of annual reports. Employing firm fixed effects and two‐stage least squares (2SLS) models, we find that political cost pressures are significantly associated with lower carbon emissions (Scope 1 and Scope 2), with the strongest effects observed for regulatory and penalty‐related disclosures. The results persist over time when lead variables are used, supporting the temporal validity of the relationships. Overall, our findings advance the political cost hypothesis by demonstrating that mandatory disclosure and external scrutiny prompt firms to enhance their actual environmental performance, thereby reinforcing institutional and stakeholder accountability mechanisms.