Who does not advance loses ground: Green investment as a strategic response by small and medium-sized enterprises to economic policy uncertainty

Abstract

This study examines how listed small and medium-sized enterprises (SMEs) respond to economic policy uncertainty (EPU exposure) through their environmental decisions. We find that SMEs are associated with increased environmental investment when facing heightened EPU exposure. Notably, SMEs with greater EPU exposure are more likely to invest in clean energy-related initiatives, underscoring the important role of the energy sector in driving corporate sustainable strategies. Additionally, this study reveals that the impact of EPU exposure on environmental investments is more salient when SMEs face fewer financial constraints, are located in more marketized regions, operate in less competitive markets and non-heavily polluting industries, and after the implementation of the 2012 Green Credit Policy. These findings suggest that SMEs are more likely to adopt sustainable practices under heightened policy uncertainty, leveraging environmental initiatives as a strategic response to facilitate firm development and growth.