The Effect of Foreign Investors on ESG Investment Efficiency: Evidence from South Korea

This study investigates the effect of foreign ownership on ESG investment efficiency, examining whether foreign investors help mitigate over-investment and alleviate under-investment in ESG activities. Using 3410 firm-year observations from 2012 to 2022, the results show that foreign ownership reduces over-ESG investment in the current period, leading to lower ESG spending subsequently, while promoting under-ESG investment, resulting in increased commitments in the following period. Further analysis reveals that this effect is more pronounced in firms with lower information asymmetry, suggesting that foreign investors function more effectively as external monitors in transparent environments. Robustness tests confirm the validity of the findings: (1) controlling for accounting quality does not alter the main results, (2) ESG sub-sample analysis shows that the effect is significant only for environmental (E) investments, and (3) Propensity Score Matching (PSM) addresses potential endogeneity concerns, confirming that the observed relationship is not driven by pre-existing firm characteristics. These findings suggest that foreign investors do not simply increase or decrease ESG investments but actively enhance ESG investment efficiency.