The Survival Signalling Paradox: How Financially Constrained Firms Defend ESG Under Climate Stress

ABSTRACT

Does climate pressure lead financially constrained firms to cut environmental, social and governance (ESG) performance or to defend it? Using 28,439 firm‐year observations from 44 countries over 2005–2023, we show that the answer depends on the firm's dependence on external capital. Managerial climate salience, measured from earnings calls, is associated with lower ESG performance on average, but the penalty is borne by unconstrained firms and reverses among constrained ones, a pattern we call the survival signalling paradox. We argue that capital dependence is a boundary condition separating two established logics: where ESG decisions are private, slack‐resource theory applies and stress produces retrenchment; where lenders observe them, withdrawing the visible ESG flow is read as evidence about viability, so the firms least able to afford ESG have the strongest reason to maintain it. Three results support this reading. Constrained firms retrench selectively, shielding ESG while cutting research and development. Among constrained firms, ESG performance under climate salience is associated with debt access in the same year. The constraint gradient also appears when climate pressure is measured by the frequency of recorded country‐level weather disasters, though not by their severity. Institutional quality and market flexibility temper the penalty but do not reproduce the firm‐level reversal. The climate–ESG relationship therefore depends on how the firm is financed.