Exchange Rate Volatility and ESG Performance: An International Empirical Analysis

ABSTRACT This study examines the impact of exchange rate volatility (ERV) on environmental, social, and governance (ESG) performance using a large dataset of 15,196 firms from various countries, covering the period from 2012 to 2019. By employing a comprehensive set of statistical tests, including the system generalized method of moments (GMM) estimation technique, the research provides robust empirical evidence on how ERV influences different dimensions of ESG performance. The results reveal a significant negative effect of ERV on ESG performance, indicating that greater exchange rate instability adversely impacts firms' sustainability practices across ESG aspects. Companies may have difficulty complying with evolving regulations and stakeholder expectations when faced with volatile exchange rates, negatively impacting their ESG performance. Regulatory responses to exchange rate fluctuations may also create compliance burdens, and the difficulty in securing resources limits their ability to invest in sustainable technologies and practices. From an efficient market hypothesis (EMH) perspective, these findings suggest that ERV introduces additional risks and uncertainties that the market reflects in corporate valuations and performance metrics, thereby affecting ESG outcomes. The study highlights implications for policymakers, investors, and corporate managers, emphasizing the need for strategies to mitigate the adverse effects of ERV on ESG performance. Limitations of the study and directions for future research are discussed, calling for further exploration of the interplay between macroeconomic factors and corporate sustainability initiatives.