Governing Sustainability: Why Democracy Enhances Social ESG but Weakens Environmental and Governance Outcomes

This study examines the relationship between democracy and national Environmental, Social, and Governance (ESG) performance using a panel dataset of 95 countries from 1990 to 2018. Employing fixed-effects regression, panel-corrected standard errors (PCSEs), and system generalized method of moments (GMM) estimations, the analysis reveals a complex and multidimensional impact of democracy on ESG outcomes. While democratic institutions enhance social sustainability—where a one-unit increase in democracy is associated with a 0.0004-point rise in social ESG scores—they simultaneously weaken environmental and governance performance, with environmental scores declining by 0.0003 per unit increase in democracy. These divergent effects reflect democracy’s capacity to promote social welfare and accountability yet also highlight structural constraints such as policy fragmentation and short-term electoral incentives that hinder comprehensive environmental and governance reforms. The findings further indicate that these trade-offs are more pronounced in developed democracies, whereas emerging democracies exhibit more balanced, albeit modest, ESG gains. By challenging the assumption that democracy uniformly advances sustainability, this study underscores the importance of institutional adaptation and targeted policy interventions to enhance ESG governance across different political contexts.