Fortress or Mirage? How Firms With Stronger Environmental Practices Shield Their Cash Holdings From the Storm of Climate Policy Uncertainty?

This study investigates the impact of climate policy uncertainty (CPU) on corporate cash holdings, focusing on how environmental performance moderates this relationship. We analyze a global sample of publicly listed S&P 500 firms from 2010 to 2023, utilizing data from Bloomberg and Compustat. Our findings indicate that increased CPU leads firms to decrease their cash reserves as they prioritize resource allocation towards strategic investments and precautionary spending. Notably, this effect is significantly less pronounced in firms with stronger environmental practices. Our research suggests that robust environmental strategies enhance corporate resilience to regulatory uncertainty, resulting in more stable cash flows and a reduced need for liquidity buffers. To ensure the reliability of our findings, we conduct several robustness checks. These include addressing potential endogeneity through a lagged variable approach, substituting firm‐level environmental scores with broader Environmental, Social, and Governance (ESG) metrics, and analyzing the differential impacts on financially constrained versus unconstrained firms. Our findings contribute to the literature by establishing a novel link between environmental performance and cash management amidst CPU. They underscore the strategic value of proactive environmental engagement in mitigating financial vulnerabilities. From a social perspective, our results highlight that environmentally responsible firms tend to perform better financially, thereby contributing to a more stable and sustainable economic system in the face of climate‐related challenges.