Financial globalization and corporate environmental, social, and governance (ESG) ratings

Corporate environmental, social, and governance (ESG) ratings are receiving growing attention in the current literature. However, most empirical studies fail to examine whether corporate ESG ratings are influenced by financial globalization (FG). This study offers a novel perspective by investigating the impact of FG on ESG ratings using two distinct measures: ESG performance and ESG controversies. We use ordinary least squares (OLS) as the baseline model and employ a robust set of sensitivity analyses—including generalized method of moments (GMM)—to address potential endogeneity concerns. The sample includes 3909 listed firms from G7 countries, totaling 23,196 firm-year observations spanning 2014 to 2022. Using three dimensions of FG (overall, de facto, and de jure), we find that FG significantly enhances corporate sustainability performance by improving ESG performance. In particular, both de jure (legal and regulatory frameworks) and de facto (actual financial flows) dimensions of FG positively affect ESG performance. Additionally, all FG dimensions play a role in reducing ESG controversies. The impact of FG dimensions on ESG controversies is more pronounced in larger firms than in smaller firms. These findings suggest that relaxing restrictions on foreign investments and increasing actual cross-border capital flows positively contribute to corporate sustainability. Finally, the findings show corporate governance practices such as audit committee independence, number of board members, female board members, and board size, play a positive role in promoting the ESG performance. The results offer new evidence on the interplay between FG and ESG ratings, with important practical implications for leveraging FG to foster sustainable corporate practices.