Navigating the political climate: the impact of political ideology divergence on ESG

Abstract We introduce the concept of entrepreneur political ideology divergence, defined as the absolute ideological distance between an entrepreneur’s political ideology and that of the respective state governance. Building on organizational research on political ideology and strategic risk management reasoning, we argue that political ideology divergence heightens entrepreneurs’ perceptions of regime uncertainty and legitimacy threats, prompting entrepreneurial firm-level responses. Specifically, we theorize and find that entrepreneurial firm engagement in environmental, social, and governance (ESG) practices functions as a strategic outcome, that is, a response entrepreneurs use to manage political ideology divergence. Using longitudinal data on 605 entrepreneur-led firms operating in the United States (U.S.) from 2010 to 2020, we find that greater political ideology divergence is associated with increased entrepreneurial firm engagement in ESG practices. We also find that entrepreneurs moderate this relationship by deploying complementary strategies, namely, using research and development (R&D) investment and lobbying to manage political divergence, thereby attenuating entrepreneurial firm engagement in ESG practices. This study contributes to research on the political economy of entrepreneurship by shifting attention from institutional constraints to entrepreneurial agency when exploring how entrepreneurs interpret and strategically respond to political ideology divergence.