The role of Environmental, Social and Governance (ESG) regulations in attracting Foreign Direct Investment (FDI)

This paper examines how the presence of environmental, social and governance (ESG) regulations in a country can enhance its attractiveness for foreign direct investment (FDI). I use country-level data on ESG regulations from the United Nations (UN)-supported network of investors called Principles for Responsible Investment (PRI). I find that the presence of ESG regulations in a country is significant correlated with higher FDI in high-income countries, and it is also correlated with higher FDI in emerging markets and developing economies (EMDE) when government?s policies are perceived as effective. The presence of ESG regulations is instead negatively correlated with FDI attraction in an EMDE when the quality of the regulatory environment for private business development is perceived negatively. Existing literature does not draw a firm conclusion on whether ESG regulations incentivize or deter private investments; for example, the pollution-heaven hypothesis posits that private investments are drawn where there are fewer or less stringent environmental regulations. This paper contributes to the literature on the role of ESG regulations and to that on the role of policies in FDI attraction, by providing a different perspective on a country?s FDI attraction potential related to the presence of country-level ESG regulations, offering a new range of opportunities for policy makers when considering the impact of ESG regulations in conjunction with the general quality and effectiveness of their regulatory system.