Abstract
Sustainable investing allocates investments based on environmental, social and governance factors (ESG). The societal value of sustainable investment is becoming progressively relevant as investors are increasingly recognizing the importance of investing in companies that seek to combat climate change, environmental destruction, while promoting corporate responsibility. Environmental policy and sustainable growth initiatives at a country-level are also being influenced by the UN’s Sustainable Development Goals (SDGs). Situated within the current trend of declining foreign direct investment flows (FDI), our study examines the role of ESG factors in attracting FDI and enabling progress toward SDGs. We econometrically examine the linkages between ESG and FDI inflows for a sample of 161 counties. We also focus on low- and middle-income emerging economies and low- and middle-income commodity exporters as these countries face unique challenges of mobilizing financing to achieve SDGs and generating sustainable economic growth. Results suggest that FDI inflows to the full sample of countries are positively attracted by good governance in a destination country. We observe that good scores on HDI deters FDI, that higher FDI flows are associated with higher levels of carbon emissions in the case of emerging markets. Sustainability reporting attracts FDI to commodity exporting countries. The study provides possibilities for future research in a post-pandemic future.
Highlights
Sustainable investing has been growing in significance, as more investors are recognizing the importance of environmental, social, and governance factors (ESG) as part of the investment decision-making process
gross domestic product (GDP) growth (GDPPCAPGR) is positively and significantly associated with our dependent variable (FDIGDP) which is consistent with literature—higher per capita GDP growth rates are positively associated with higher levels of foreign direct investment inflows (FDI) inflows
The variable CRISIS has a negative and significant association with the level of FDI inflows and supports the view that FDI as a percentage of GDP significantly reduced during the financial crisis of 2008 and 2009
Summary
Sustainable investing has been growing in significance, as more investors are recognizing the importance of environmental, social, and governance factors (ESG) as part of the investment decision-making process. According to J.P. Morgan [1], the pandemic of 2020 is the latest “wake-up call” for economic policymakers and investment decision makers to prioritize a more sustainable approach to investment. The literature is largely silent on the significance of ESG factors for foreign direct investment inflows (FDI) from a macro-country perspective. This shortcoming in the extant literature motivates our paper which examines the association between ESG factors and FDI inflows for a sample of 161 countries. Our analysis will especially focus on the ESG—FDI linkages for low and middle-income emerging market economies and commodity exporters
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