Sustainable development in turbulent environments: The impact of ESG capabilities on responses to turbulence

Abstract

Firms are increasingly operating in turbulent environments in which unpredictable change is driven by causes such as climate change and economic crises. In this paper, we study how firms perceive environmental turbulence and respond with four types of actions. We distinguish between actions creating economic value for the firm and actions creating sustainable value for society and the environment and between substantive and symbolic actions with only the former changing firms' strategies, structures, and processes. We built a unique dataset on large European firms and their 470 responses to turbulence from 2017 until 2022. We show that in volatile and complex environments, in which rapid change occurs but information is available, firms respond with substantive actions. In uncertain and ambiguous environments that lack information, firms respond with symbolic actions. These findings hold for responses that aim to create both economic and sustainable value. However, these findings change when firms acquire environmental, social, and governance (ESG) capabilities. With high and improving ESG capabilities, firms are more likely to respond with sustainable substantive actions, even when they perceive their environments to be uncertain. We contribute to the literature on organizational capabilities and corporate environmental responsiveness by showing that firms with superior and improving ESG capabilities increase their substantive commitments to sustainable development and are less inclined to base their responses on their perception of turbulence.