Environmental, social, and governance integration: the case of microfinance institutions

Abstract Microfinance institutions (MFIs) contribute greatly to sustainable development through microlending. This paper establishes a bridge between political stakeholder theory, social responsive theory, and institutional theory as applied to the functioning of MFIs. By establishing a nexus between these theoretical concepts, we investigate whether country‐level socio‐economic freedom, human development, and environmental issues affect the engagement and integration of environmental, social, and governance (ESG) activities by MFIs. Using a sample of 2,064 MFIs from 94 countries for the period 2007 to 2018, we find that MFIs from countries with higher socio‐economic freedom, coupled with higher human development, may adhere to superior ESG policies. We posit that this is due to pressure from stakeholders to incorporate the triple bottom line objectives of ‘profit, people, and the planet’. ESG integration is in line with institutional theory and enriched by political stakeholder theory.