Economic policy uncertainty and micro-level green development: an empirical study of Chinese textile firms

As the world’s second-largest polluter, the Environmental, Social, and Governance (ESG) transformation of the textile industry is crucial for global sustainable development. China, as a major global textile producer, has textile enterprises whose ESG performance directly impacts global climate governance objectives. However, economic policy uncertainty (EPU) poses a significant challenge to the ESG investment decisions of textile firms. ESG investments within the textile sector are characterised by substantial upfront capital, prolonged payback periods, and elevated risks, rendering them highly dependent on a stable policy environment. Policy uncertainty can significantly impede enterprises’ green transition. This study investigates the impact of EPU on the ESG performance of Chinese A-share textile companies from 2009 to 2024. Our findings indicate that heightened EPU significantly diminishes the ESG performance of textile enterprises. This negative effect is particularly pronounced in financially distressed firms, those with lower information transparency, and state-owned enterprises. Mechanism analysis reveals that EPU primarily hampers ESG investment in textile firms by exacerbating bank credit contraction and prompting firms to increase cash holdings, which collectively reduce their working capital circulation capacity. This paper extends the literature on ESG determinants from a macro policy perspective, offering novel theoretical insights and empirical evidence for understanding the green transformation of traditional manufacturing industries.