Measuring Sustainability Under Uncertainty: Introducing Net ESG (N‐ESG) Performance

ABSTRACT This study examines the reliability of environmental, social, and governance (ESG) scores in uncertain environments by introducing a new indicator, Net ESG (N‐ESG), for the first time. This new index was calculated by subtracting a new ESG‐based sustainability uncertainty index (ESGUI) from ESG scores. This study employed Pedroni (2004) and Westerlund (2007) tests, as well as the DOLS method, for 12 developed countries from 2002 to 2020. It analyzed the impact of economic, geopolitical, climate, and energy price‐related uncertainties on both ESG and N‐ESG through eight different models. Empirical findings indicate that a 1% change in CPU, GPR, EPU, and OPU indices increases ESG by 0.048, 0.355, 0.111, and 0.044 units, respectively, while the same rate of change decreases N‐ESG by −6.501, −18.756, −8.972, and −8.193 units, respectively. These results can be interpreted as ESG scores may not fully reflect the “true” performance of companies in times of uncertainty, while N‐ESG provides a more accurate representation of sustainability practices. These results suggest that policymakers should focus their sustainability policies not only on increasing ESG scores but also on preserving the true value of ESG by reducing uncertainty effects.