Sustainability in the European Union : The Role of Financial Development in Environmental, Social and Governance (ESG) Performance

Abstract: This thesis addresses the relationship between financial development and CSR performance, based on countries within the EU. The main objective of this thesis is to critically analyse and discuss the impact of financial development on CSR performance, through using ESG performance as a proxy. Additionally, this study aims at analysing the inclusion of institutional factors when examining the relationship. While the issue of how financial development impacts individual sustainability dimensions is quite well-researched, only one study is found to examine the precise relationship between financial development and ESG performance, concluding a positive linkage in Asia. No similar study is found in the region of the EU. We find the relationship to be complex, where various channels of influence are identified when examining ESG dimensions separately. To examine this relationship, we used panel data regression analysis, based on country level data for EU’s individual member states. Our findings show a complex relationship, implying that financial development has various impacts on ESG performance and varies throughout the range of financial development. This is in contrast to previous empirical research regarding the relationship, concluding an overall positive impact. This study provides no evidence that institutional factors affect the relationship between financial development and ESG performance, but argues for the importance of institutional inclusion, due to the identified influence on ESG practices through channels such as governing laws, regulations, norms and culture. Finally, financial development is concluded as an important catalyst to promote ESG performance within the EU. When suggesting any policy implementation, it is important to keep in mind that different countries within the EU may have different needs regarding the most efficient approach to increase ESG.