Country-level sustainability and cross-border banking flows

Purpose - This paper aims to investigate the association between country-level sustainability scores and cross-border bank-to-non-bank flows within countries. Design/methodology/approach - The authors analyze cross-border banking flows into the real sector firms of 26 developed countries from 2006 to 2017. The authors use a dynamic panel ordinary least square along with an instrumental variable and a generalized method of moments regressions to test the relationship between country-level sustainability scores and cross-border banking flows. Additionally, the authors apply Fama-MacBeth cross-sectional regression and non-parametric portfolio tests to obtain robust results. Findings - The impact of country-level sustainability scores on cross-border banking flows is positive and significant. This finding is consistent with the signaling theory, which states that a country’s sustainability score is a signal to attract more international fund flows. Notably, the authors deduce that environmental sustainability is more important than the social and governance pillars. Practical implications - The findings indicate that the real sector firms located in countries having higher sustainability scores can receive more international bank flows. Consequently, policymakers should focus more on country-level sustainability investments to improve the financing of resident firms. Social implications - Policymakers should focus more on country-level sustainability investments to improve the financing of resident firms. Originality/value - To the best of the authors’ knowledge, no existing study has investigated the signaling function of country-level sustainability scores in the cross-border banking flow conjecture. By investigating this relationship for real sector firms, this study portrays how the non-banking sector can benefit from such a policy that promotes sustainable practices at the country level.