ESG (Environment, Social, and Governance) development: What is the role of financial development at the global level?

Abstract

Financial intermediation theories and empirical research highlight the importance of financial sector development (FSD) for industrial development and economic growth. FSD contributes positively to economic growth and poverty alleviation by channeling excess resources from savers to borrowers. However, less is known about the impact of FSD on environmental,
social, and governance (ESG) performance. This study examines the impact of FSD on ESG performance globally, utilizing cross-country data from 2000 to 2019. Our analysis shows that country-level financial sector development positively and significantly influences aggregate ESG performance as well as its individual components (Environment, Social, and Governance). These results remain consistent across various proxies and model specifications. The findings offer significant insights for policymakers and stakeholders, identifying financial development as a catalyst for promoting ESG performance worldwide.