Paying for Privilege: How Political Contributions Undermine Environmental Sustainability — and How Executive Contracting Can Restore Balance

Abstract

We are interested in investigating whether firms use political donations as a license to neglect environmental sustainability. We further deepen the examination by exploring the role of executive contracting. Drawing on a wide range of data between 2002 and 2021 and a global sample, our findings confirm that firms use political contributions as a license to neglect environmental sustainability. More specifically, we find that political donors have a poor environmental performance which is confirmed by the composite environmental score as well as its two dimensions namely emissions and eco-innovation performance if not resource consumption performance. However, executive ESG contracting helps political donation givers strengthen their environmental performance. Further tests reveal that board independence and cash flow help political donors enhance their environmental performance. Female directors are also useful in breaking the negative link between political donation and environmental performance if they cannot turn this link into a positive relationship. Finally, the results highlight that the institutional environment (i.e., environmental tax) matters in using political contribution as a license to neglect environmental sustainability. The findings are robust to alternative samples, political donation proxy, endogeneity issues, and the Paris Treaty. In the end, we propose our theoretical and managerial implications.