Enhancing corporate sustainability under uncertainty: The roles of geopolitical risks and carbon market in shaping ESG performance

Amid rising Geopolitical Risks (GPR) and climate pressures, ESG performance is a critical indicator for assessing corporate sustainability and stability. Currently, a dynamic framework is lacking to examine the time-varying interactions among GPR, the carbon market, and ESG outcomes, particularly across high and low-carbon firms. This research applies the Time-Varying Parameter Vector Autoregression (TVP-VAR) model to Chinese listed firm data (2018–2025) to map the transmission pathways of geopolitical shocks. Results reveal GPR's asymmetric impact via the carbon market: high-carbon firms face “policy-driven volatility,” while low-carbon firms demonstrate stronger “technology-enabled stability.” Carbon market maturity significantly shaped corporate strategies, enabling notable ESG improvements for low-carbon firms post-2021, supported by a positive ESG-carbon market feedback loop. These findings offer dynamic insights for policymakers refining ESG frameworks and managers building effective adaptive strategies.