How sovereign environmental, social, and governance integration shapes systemic sustainability in the financial sector: An international investigation

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Using a dataset of 55 countries from 2002 to 2020, this study examines the impact of countries’ integration of sovereign environmental, social, and governance (SESG) activities into systemic risk. Based on data from the World Bank for 16 different indicators, we develop a SESG index through principal component analysis and varimax rotation. We measure systemic risk using a metric for catastrophic risk in the financial sector and perform multivariate regression analysis with a beta regression framework. Overall, our results suggest that countries’ inclusion of SESG is related to lower systemic risk. The environmental and social components have a higher impact, but governance has no impact. Our extended analysis based on the countries’ gross national income shows that this relationship is heterogeneous, such that high- and upper-middle-income countries have systemic stability, whereas lower- and lower-middle-income countries have adverse effects. Our findings indicate that SESG and financial stability are interrelated, which demonstrates that macro-level integration of sustainability is linked to financial resilience.