Do ESG Risks Constitute a Financial Deterrent to Investment Attractiveness? An Empirical Multi-Country Analysis

The growing incorporation of environmental, social, and governance (ESG) considerations into global financial systems has significantly influenced investment decision-making. Previous studies have mainly concentrated on ESG performance and their associated implications for businesses and have failed to examine the role of ESG risks in shaping barriers to cross-border investment. In this regard, this paper attempts to analyze the effects of ESG risks on foreign direct investment (FDI) inflows based on an unbalanced panel dataset for up to 250 countries spanning the years 2000 to 2024, coupled with cross-sectional data for 2020. This study uses a two-dimensional approach, whereby structural ESG risks are evaluated using panel FMOLS regression, while ESG risk exposures are assessed using cross-sectional models. This research also considers moderating factors such as economic development, industrial composition, and innovation capabilities. Based on the use of the national-level ESG risk, it is evident that ESG risks considerably reduce inward foreign direct investment.