Political uncertainty and corporate green investment: Evidence from European firms

Political uncertainty is a primary source of friction hindering firm-level decarbonization efforts toward Europe’s 2050 climate neutrality target. This study provides a quantitative investigation of this issue by analyzing the impact of political uncertainty on green investment using a comprehensive panel dataset of European firms from 2016 to 2021. We employ a novel keyword-based proxy extracted from annual reports to measure green investment and utilize an instrumental variable (IV) approach as a supplementary strategy to mitigate potential endogeneity concerns. Our findings reveal that heightened political uncertainty, particularly at the national level, significantly discourages green investment. This effect is heterogeneous: it is more pronounced for financially constrained firms that are less equipped to withstand policy shocks. Conversely, firms with established political connections exhibit greater resilience, effectively mitigating the negative impacts of uncertainty. Furthermore, the analysis highlights regional heterogeneity, with firms in the EU and the UK demonstrating higher sensitivity to continental-level uncertainty. Overall, these results underscore the critical role of policy stability in mobilizing the private capital essential for a low-carbon transition, offering vital insights for both policymakers and firm managers.