Greening on Hold: Environmental Political Risk and the Reallocation of Corporate Investment

Boards and institutional investors increasingly monitor firms’ climate commitments through engagement, stewardship, and executive pay tied to environmental targets. We study how environmental political risk (E-PRisk) shapes the green investment decisions that these monitors evaluate. Combining conference-call-based firm-level E-PRisk with global green and non-green investment data, we find that higher E-PRisk predicts subsequently lower green and higher non-green investment. Both reverse as E-PRisk resolves. When close elections occur in the intervening year, E-PRisk persists longer and green reversals weaken. The effects concentrate in capital expenditures, and among financially constrained firms or those with less redeployable assets. Together, the findings are consistent with a real option mechanism in which firms postpone irreversible green projects and redirect capacity toward other projects, making investment composition a key adjustment margin. For corporate governance, the results suggest that a temporary drop in green investment under policy uncertainty need not signal weak commitment, which matters for how boards and investors judge climate commitments. Oversight, stewardship, and climate-linked pay that evaluate green investment year by year may therefore penalize delays that reflect policy risk rather than weak commitment. More broadly, the results show how the political environment shapes the capital-allocation decisions that corporate governance is meant to monitor.