A Study on the Role of Economic and Institutional Environment on the Corporate Responsibility Performance and its Synchronization

Kim, Jong-Hee Article A Study on the Role of Economic and Institutional Environment on the Corporate Responsibility Performance and its Synchronization East Asian Economic Review (EAER) Provided in Cooperation with: Korea Institute for International Economic Policy (KIEP), Sejong-si Suggested Citation: Kim, Jong-Hee (2024) : A Study on the Role of Economic and Institutional Environment on the Corporate Responsibility Performance and its Synchronization, East Asian Economic Review (EAER), ISSN 2508-1667, Korea Institute for International Economic Policy (KIEP), Sejong-si, Vol. 28, Iss. 4, pp. 459-489, https://doi.org/10.11644/KIEP.EAER.2024.28.4.442 This Version is available at: https://hdl.handle.net/10419/316638 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may be saved and copied for your personal and scholarly purposes. You are not to copy documents for public or commercial purposes, to exhibit the documents publicly, to make them publicly available on the internet, or to distribute or otherwise use the documents in public. If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by/4.0/ PISSN 2508-1640 EISSN 2508-1667 an open access journal East Asian Economic Review vol. 28, no. 4 (December 2024) 459-489 https://dx.doi.org/10.11644/KIEP.EAER.2024.28.4.442 ⓒ Korea Institute for International Economic Policy A Study on the Role of Economic and Institutional Environment on the Corporate Responsibility Performance and its Synchronization Jong-Hee Kim† Jeonbuk National University [email protected] 1 This paper analyzed how the country’s institutional and political environment affect ESG performance of the companies in the country. An empirical analysis of this study results are as follows. First, the clear difference in financial variables such as the growth rate of foreign direct investment, pension fund assets to GDP ratio, and stock market return rate was found to the significance between advanced economies and emerging markets. Second, in two groups, the institutional indexes, which refer to government policy and the country’s institutional environment such as the rule of law, the government effectiveness, corruption control, and citizens’ voice and accountability showed a positive relationship with ESG performance of the companies. They had a particularly large positive effect on the companies in emerging markets. And third, companies’ synchronization with other companies’ high ESG performance had a positive effect on their ESG performance, and such a tendency was much stronger in the companies of emerging markets. Additionally, institutional dimension had a positive effect on the companies’ synchronization, and such a tendency was much stronger in emerging markets. Keywords: Corporate Social Responsibility, ESG Performance, Institutional Environment, ESG Synchronization JEL Classification: G30, G38, O10 I. Background Since the mid-to late 2000, among developed countries’ financial and stock markets, Corporate Social Responsibility (CSR) is the term that is being brought up more frequently. In the past, the financial success of a corporation was regarded as an † Corresponding Author, Professor, Economics College of Commerce, Jeonbuk National University, 567 Baekje-daero, Jeonju-si, Jeollabuk-do, 561-756, Republic of Korea. ID 460 Jong-Hee Kim ⓒ Korea Institute for International Economic Policy important aspect when considering whether to invest in a company. However, in the present-day, non-financial success is also becoming an important element to consider when choosing a company in which to invest. CSR takes into account a company’s management activities, and considers not only its economic growth, but also how it must balance its economic growth with social and environmental responsibility. It stipulates that a company must act responsibly regarding its employees and customers, and that the stockholder is held responsible to all parties involved, such as cooperative and competitive companies, as well as the larger community. In the case that an issue is not handled responsibly by the company, its competitiveness and possibility for growth weakens. According to CSR, corporate sustainability management is positioned as a necessary goal for the company’s management. Also, the investor’s continued interest in the company is influenced by the success of its corporate sustainability management. As an alternative way to measure CSR, ESG has recently sparked worldwide. ESG signifies environmental responsibility, social responsibility, and governance, and has come to be an investment guide as it signals a new paradigm for business management strategy. Essentially, ESG can be interpreted as a value system that attempts to realize continued prosperity for humankind. The scale of investing in companies based on their ESG has been consistently increasing. In 2020, the global scale of investment in ESG was 35.0 trillion dollars. This has increased 15% from 30 trillion 700 billion dollars in 2018. In 2022, the scale was 30.3 trillion dollars,1 but it was due to the strengthened standard to prevent the green washing2 from sustainable investment. Additionally, 35.9% of the investment scale is made up of investments from the U.S., Europe, Australia, Japan, Canada, etc. The importance of ESG has grown in emerging markets, but awareness of the scale of investment is weak compared to other highly developed nations. In comparison to the case of advanced economies, the countries in emerging markets have shown insufficient awareness and success in their companies’ ESG. In advanced economies, companies are highly involved in activities relating to nonfinancial success, such as corporate social responsibility activities and responsible investing. In comparison, the companies in emerging markets are just recently 1 ‘Global Sustainable Investment Review’, 2023. 2 It is the act of making false or misleading statements about the environmental benefits of a product or practice. A Study on the Role of Economic and Institutional Environment on the Corporate Responsibility Performance and its Synchronization 461 ⓒ 2024 East Asian Economic Review beginning to show an interest in ESG. While emerging markets countries’ economy and technological development have met that of highly developed countries, it has not yet achieved the same standard in areas related to the environment or energy usage. As such, it is necessary for the countries to find ways to cope with the rapid institutional changes related to ESG. Although there is existing study regarding different companies’ success in ESG based on companies’ financial success and value, there is only limited study on how this relates to the countries the companies belong to, and how their economic, political and institutional qualities affect the success of ESG. In other words, there is insufficient research on how exogenous variables affects companies’ ESG. There are many factors that affect a company’s ESG, but above all else, it is difficult to organize panel data based on the ESG performance of companies in multiple countries. In other words, it is difficult to compose source material that commonly contains a country’s individual companies’ ESG data. Taking this difficulty into account, this study uses data from 16 countries that contains information regarding each country’s companies’ ESG. And it also attempts to examine how each country’s respective economic, political, and institutional differences influence the success of the companies’ ESG. Specifically it investigates the clear difference of the relationship between ESG performance and country’s exogenous aspects by classifying 16 countries into 8 advanced economies (Australia, France, Germany, Japan, Sweden, Switzerland, United Kingdom, United States) and 8 emerging markets (China, Hong Kong, India, Indonesia, Malaysia, Singapore, South Korea, Thailand). While ESG, GDP, and GNI already separate highly developed countries from other countries, the normalization and institutionalization of ESG as it establishes itself in the global economy has the possibility to harm companies in emerging markets. This is because ESG has become a standard for comparison for companies when they are evaluated as possible investment opportunities by global funds, as companies can be excluded as candidates if they do not meet the standard. As a result, analyzing how the exogenous aspects in various countries affect companies’ ESG’s performance, such as the country’s policies, economy, and institutional differences, can be a good guideline for how firms can improve their ESG performance. Shedding light on this guideline is the objective of this study. 462 Jong-Hee Kim ⓒ Korea Institute for International Economic Policy II. Literature Review Firstly, in the topic of the companies’ social responsibility proxy as a variable affecting ESG, diverse study was completed. Gjølberg (2009) and Skouloudis (2014) used well-regarded indexes from reputable institutions, like the Dow Jones Sustainability Index (DJSI), Global 100, and the UN Global Compact. These indexes focus on corporate social responsibility and sustainability and publish ranked reports of applicable companies each year. In comparison, Balatbat (2012), Lin et al. (2017) used grades given for ESG, but in the specific categories evaluated there were differences between countries. As a result, there was difficulty in comparing the success between the companies evaluated. According to Yamaguchi (2008) and Nelling and Webb (2009), it is difficult to prove a relationship of direct causation between two variables because of the untrustworthy numeral rating scale measuring the corporate social responsibility when using companies as the unit of measure. Secondly, in the case of the relationship between ESG and companies’ value, the contradictory study results are mixed up. According to Lin et al (2009), and Hatch and Mirvis (2010), there is a significant, positive relationship between the success of a company’s corporate social responsibility and financial success. This is because they found that, in the long term, a given company’s social responsibility increases its production and effective management and decreases its expenses. This also connects financial success with the stockholders’ value which, as a result, allows the company to acquire more trustworthy stockholders. According to Gregory et al. (2016) strengthening a company’s CSR improves the relationship between stockholders, NGOs, and consumers. As a result of this, brand equity also saw an increase. Godfrey, Merrill, and Hansen (2009), Edams (2011), and Gregory et al. (2016) found that, from a long-term perspective, actively participating in corporate social responsibility activities gave a competitive advantage when making investment decisions. On the other hand, researchers such as Palmer, Oates and Portey (1995), and Barnea and Rubin (2005) regard CSR as an unnecessary expense that can negatively influence the value of corporations. They also assert that CSR can create other problems related to the capital structure and ownership of the company, which has the possibility to devalue the company. A Study on the Role of Economic and Institutional Environment on the Corporate Responsibility Performance and its Synchronization 463 ⓒ 2024 East Asian Economic Review And third, in the attempt to ascertain if there is any meaningful impact by countries’ economy and political policies on ESG, there is relatively limited research covering how a country’s economic state, institutions, and policies affect companies’ ESG performance. Campbell (2007) shows, from an institutional perspective, that the primary variables affecting different countries’ companies’ social responsibility are the various economic environments and institutions existing within that country. Chih et al. (2010) shows that as the concentration of market competitiveness increases the two variables establish a positive correlation. Orlitzky et al. (2003), and Beurden and Gossling (2008) shows that in countries with stricter laws and restrictions, companies tend to be more active in CSR. The research also shows that each country’s economic situation and political policies affects its CSR, and that each company’s ESG performance depends on which industry the company belongs to. Balatbat (2012) shows that while the relationship between the two variables depends on the industry, the industries with the most positive correlation are the construction industry, the electric and gas industry, and the energy field. Finally, the main variables of this paper are closely related to the ESG performance. The institutional investors can play an important role of in the social responsibility investment. Hence, there is positive relationship between pension fund assets and ESG performance. Chung et al. (2002) and Gugler et al. (2008) found that the higher share ratio of institutional investors can be led to the higher performance of social responsibility of the firm from the better market monitoring function. And in the case of result of relationship between ESG performance and stock market return rate, when considering a company’s growth stage, no significance was found between ESG performance and corporate values. However, as the company grew and reached a stable state, the two variables developed a positive relationship. Similar results can be seen in studies such as Borgers et al. (2013) and Nollet et al. (2016). Additionally, ESG performance can be improved depending on the state of the institutional and political environment of the country. Campbell (2007) revealed that the economic institutional environment of each country are major variables as factors affecting the social responsibility of individual companies from an institutional point of view. In relation to this, the majority of the existing research on ESG is focused on companies’ financial structure, how the success of ESG can improve the company’s financial structure and, ultimately, increase the company’s overall value. There is 464 Jong-Hee Kim ⓒ Korea Institute for International Economic Policy relatively less research about how countries’ institutions and policies can effect a certain company’s ESG. However, depending on what country the company belongs to, that country’s economic, institutional, and political situation can influence the relationship between the company’s CSR and financial performance. As such, there is a need for research that compares each country’s common ESG performance with its CSR performance, which in turn can reflect how companies’ ESG performance is affected by that country’s unique traits. Ш. Model and Data The general classification for the Environment (E), Social (S) and Governance (G) pillars are the same for each country, but specific criteria between countries differ. And to compare the ESG performance across multiple countries, common criteria are required. There are specific criteria within the ESG pillars that differ between countries, there are also fields that the countries have in common. In the case of the Environment (E) pillar, the common criteria are resource use, emissions, and environmental innovation. The common fields in the Social (S) pillar are workforce, human rights, community, and product responsibility. As for the Corporate Governance (G) pillar, there is management, shareholders, and CSR strategy. Each category was given a raw score out of 100 points. To normalize each companies’ raw ESG score, one can consider a weighted average from a simple weighted value method. However, this way can be aroused some biases such as the concentration of large firms, regional variation, and exclusion of specific industry. A large firm eases to take high score of ESG performance using the high level of capital and human source. And regional variation can be existed from data disclosure. More specifically, a specific industry, which is in the relative risk field can be excluded. To solve this problem, this study use PCA (Principal Component Analysis) method. PCA method is a dimensionality reduction method that is often used to reduce the dimensionality large data sets, by transforming a large set of variables into a smaller one that still contains most of the information in the large set. The formula for PCA of this study is as follows. 𝐸𝐸𝑖𝑖𝑘𝑘=𝛼𝛼1𝑥𝑥11+𝛼𝛼2𝑥𝑥12+𝛼𝛼3𝑥𝑥13+𝜇𝜇𝑖𝑖 (1)-1 A Study on the Role of Economic and Institutional Environment on the Corporate Responsibility Performance and its Synchronization 465 ⓒ 2024 East Asian Economic Review 𝑆𝑆𝑖𝑖𝑘𝑘=𝛽𝛽1𝑥𝑥21+𝛽𝛽2𝑥𝑥22+𝛽𝛽3𝑥𝑥23+𝛽𝛽4𝑥𝑥24+𝜇𝜇𝑖𝑖 (1)-2 𝐺𝐺𝑖𝑖𝑘𝑘=𝛾𝛾1𝑥𝑥31+𝛾𝛾2𝑥𝑥32+𝛾𝛾3𝑥𝑥33+𝜇𝜇𝑖𝑖 (1)-3 Here, 𝑘𝑘, is the country and 𝑖𝑖 is the company of the country. 𝑥𝑥11, 𝑥𝑥12, and 𝑥𝑥13 are the items of the Environment (E) pillar, which contains resource use (𝑥𝑥11), emissions (𝑥𝑥12), and environmental innovation (𝑥𝑥13) respectively. 𝑥𝑥21, 𝑥𝑥22, 𝑥𝑥23, and 𝑥𝑥24 are the items of the Social (S) pillar, which contains workforce (𝑥𝑥21), human rights (𝑥𝑥22), community (𝑥𝑥23), and product responsibility (𝑥𝑥24). And 𝑥𝑥31, 𝑥𝑥32, and 𝑥𝑥33 are the items of the Corporate Governance (G) pillar, which contains management (𝑥𝑥31), shareholders (𝑥𝑥32), and CSR strategy (𝑥𝑥33) respectively. Using the above formulas, it is possible to get the factor loading (𝑥𝑥∗) and weighted value (w, 0 ≤ 𝑤𝑤𝑖𝑖𝑖𝑖′≤1, ∑𝑤𝑤𝑖𝑖𝑖𝑖′= 1) of each item of ESC of individual companies. The dimensions (𝑑𝑑) of three pillars of ESG can be calculated using three formulas as follows. 𝐸𝐸𝑖𝑖𝑘𝑘(𝑑𝑑1) = 1 2��𝑥𝑥11 ∗2+𝑥𝑥12 ∗2+𝑥𝑥13 ∗2 �𝑤𝑤11 2+𝑤𝑤12 2+𝑤𝑤13 2+ �1−�(𝑤𝑤11−𝑥𝑥11 ∗)2+(𝑤𝑤12−𝑥𝑥12 ∗)2+(𝑤𝑤13−𝑥𝑥13 ∗)2 𝑤𝑤11 2+𝑤𝑤12 2+𝑤𝑤13 2�� (2)-1 𝑆𝑆𝑖𝑖𝑘𝑘(𝑑𝑑2)= 1 2��𝑥𝑥21 ∗2+𝑥𝑥22 ∗2+𝑥𝑥23 ∗2+𝑥𝑥24 ∗2 �𝑤𝑤21 2+𝑤𝑤22 2+𝑤𝑤23 2+𝑤𝑤24 2+ �1−�(𝑤𝑤21−𝑥𝑥21 ∗)2+(𝑤𝑤22−𝑥𝑥22 ∗)2+(𝑤𝑤23−𝑥𝑥23 ∗)2+(𝑤𝑤24−𝑥𝑥24 ∗)2 𝑤𝑤21 2+𝑤𝑤22 2+𝑤𝑤23 2+𝑤𝑤24 2�� (2)-2 𝐺𝐺𝑖𝑖𝑘𝑘(𝑑𝑑3) = 1 2��𝑥𝑥31 ∗2+𝑥𝑥32 ∗2+𝑥𝑥33 ∗2 �𝑤𝑤31 2+𝑤𝑤32 2+𝑤𝑤33 2+ �1−�(𝑤𝑤31−𝑥𝑥31 ∗)2+(𝑤𝑤32−𝑥𝑥32 ∗)2+(𝑤𝑤33−𝑥𝑥33 ∗)2 𝑤𝑤31 2+𝑤𝑤32 2+𝑤𝑤33 2�� (2)-3 𝑥𝑥∗ stands for the coefficient values from PCA. These formulas implies that each dimensions of the ESG pillars is calculated from the arithmetic mean (1/2) between the most ideal score (1 point) and the score of the worst situation for items of ESG 466 Jong-Hee Kim ⓒ Korea Institute for International Economic Policy pillars. And it is possible to calculate a comprehensive ESG index companies (IESG) in each of countries. 𝐼𝐼𝐸𝐸𝑆𝑆𝐺𝐺𝑖𝑖𝑘𝑘= 1 −�(1−𝐸𝐸𝑖𝑖𝑘𝑘(𝑑𝑑1))2+(1−𝑆𝑆𝑖𝑖𝑘𝑘(𝑑𝑑2))2+(1−𝐺𝐺𝑖𝑖𝑘𝑘(𝑑𝑑3))2 √3 (3) Using the above formula, it is possible to calculate IESG for companies in each country, with values ranging from 0 to 1. It implies that as the company’s ESG performance increases, the values become closer to 1. This index format is suitable to this research because it reflects the weight of the specific factors that comprise ESG, and also allows for easy comparison of ESG performance between countries. Now that the companies’ ESG performance has been calculated, the factors that affect ESG performance are able to be investigated from the next formula. 𝐼𝐼𝐸𝐸𝑆𝑆𝐺𝐺𝑖𝑖,𝑡𝑡 𝑘𝑘=𝛼𝛼0+𝛼𝛼1∆𝑦𝑦𝑡𝑡𝑘𝑘+𝛼𝛼2∆𝑙𝑙𝑡𝑡𝑘𝑘+𝛼𝛼3∆𝐼𝐼𝑡𝑡𝑘𝑘+𝛼𝛼4∆𝑖𝑖𝑡𝑡𝑘𝑘 + 𝛼𝛼5∆𝐹𝐹𝐹𝐹𝐼𝐼𝑡𝑡𝑘𝑘+𝛼𝛼6∆𝑦𝑦𝑦𝑦𝑡𝑡𝑘𝑘 + 𝛼𝛼7∆𝑃𝑃𝐹𝐹𝑡𝑡𝑘𝑘+𝛼𝛼8∆𝑟𝑟𝑡𝑡𝑘𝑘+𝛼𝛼9∆𝐶𝐶𝐶𝐶𝑡𝑡𝑘𝑘+𝛼𝛼10∆𝑅𝑅𝑅𝑅𝑡𝑡𝑘𝑘+𝛼𝛼11∆𝐺𝐺𝐸𝐸𝑡𝑡𝑘𝑘+𝛼𝛼12∆𝑉𝑉𝑉𝑉𝑡𝑡𝑘𝑘 + 𝑉𝑉𝑖𝑖+𝐵𝐵𝑡𝑡+𝜖𝜖𝑖𝑖,𝑡𝑡 𝑘𝑘 (4) The variables that are considered are the country’s economy and policies. In this formula, 𝑘𝑘 represents country, 𝑡𝑡 represents time, and 𝑖𝑖 represents firm respectively. The first four variables are considered economic situation of the country, ∆𝑦𝑦, ∆𝑙𝑙, ∆𝐼𝐼, and ∆𝑖𝑖 are the growth rate of GDP per capita, labor force participation rate, industry, value added to GDP ratio, and interest rate respectively. The second four variables are the ones with the financial markets. ∆𝐹𝐹𝐹𝐹𝐼𝐼 ∆𝑦𝑦, ∆𝑃𝑃𝐹𝐹, and ∆𝑟𝑟 stand for the growth rate of foreign direct investment, bank stability, pension fund assets to GDP ratio, and stock market return rate respectively. The last four variable are considered for the policy and institutional environment of the country. ∆𝐶𝐶𝐶𝐶, ∆𝑅𝑅𝑅𝑅, ∆𝐺𝐺𝐸𝐸, and ∆𝑉𝑉𝑉𝑉 are the level of corruption control, rule of law, government effectiveness, and citizens’ voice and accountability respectively. And 𝑉𝑉𝑖𝑖 and 𝐵𝐵𝑡𝑡 are each fixed effect models and account for the “firm” dummy variable and “year” dummy variable. Through these equations, it is possible to analyze the how the economy and policy variables of each country affect individual firms’ ESG performance. Secondly, in addition to the analysis of the ESG performance of companies according to the individual characteristics of each country, this study applies the A Study on the Role of Economic and Institutional Environment on the Corporate Responsibility Performance and its Synchronization 473 ⓒ 2024 East Asian Economic Review according to regulations shows the highest value. The lowest items in each three pillars are environmental improvement capability of the Environment (E) pillar, basic human rights of the Social (S) pillar, and corporate social responsibility of the Corporate Governance (G) pillar respectively. The following table shows the average values for companies’ ESG scores in individual countries. Table 3. Descriptive Statistics of the Variables: ESG by Country Classification Country Companies ESG Environment (E) Social (S) Corporate Governance (G) Advanced Economies Australia 280 38.40 25.92 38.84 50.11 France 86 65.63 71.43 70.26 54.30 Germany 85 60.06 57.83 63.56 56.17 Japan 407 45.29 47.98 39.35 48.91 Sweden 59 60.06 59.16 64.29 55.61 Switzerland 65 54.42 51.54 56.45 54.45 United Kingdom 297 52.07 46.92 53.64 54.79 United States 1,287 45.40 33.16 47.76 52.25 Emerging Markets China 97 37.93 35.74 29.92 52.38 Hong Kong 58 47.33 47.12 45.71 50.73 India 97 49.73 42.00 54.05 49.71 Indonesia 38 47.11 34.17 52.01 50.71 Malaysia 51 45.00 34.99 47.36 50.37 Singapore 37 43.02 37.17 42.46 49.57 South Korea 116 47.76 46.40 45.94 50.60 Thailand 34 56.54 51.63 62.92 51.72 Note: Average values from 2011-2022. Among the countries in advanced economies, the average ESG performance of 86 companies in France is 65.63 which is the highest value, while 38.40 point of 280 companies in Australia is the lowest. The average ESG performance of 86 companies in France shows the highest value in the items of the Environment (E) pillar and Social (S) pillar, while Australia’s 280 companies shows the lowest. However, the items of Corporate Governance (G) pillar shows different pattern. The value of 85 companies in Germany is the highest, while it shows the lowest in 407 companies of Japan. 474 Jong-Hee Kim ⓒ Korea Institute for International Economic Policy In the case of emerging markets, the average ESG performance of 34 companies in Thailand is 56.54 which is the highest value, while 37.93 point of 97 companies in China is the lowest. In the case of Chinese companies, the values of Environment (E) pillar and Social (S) pillar are the lowest, while the value of Corporate Governance (G) pillar is the highest. In the case of 34 companies in Thailand, they have the highest value in two pillars, Environment (E) and Social (S) pillar. And 97 companies in India shows the lowest value of Corporate Governance (G) pillar. Ⅳ. Empirical Results The first step to analyze the determinants of ESG performance of companies in 43 countries is the estimation of integrated ESG index (IESG). Hence, based on the value regarding companies ESG, this study calculates all parameters for the equations 2 and 3 to estimate IESG. Table below reports the results of the parameters estimation. Table 4. Results of Parameters Estimations E Advanced Economies Emerging Markets S Advanced Economies Emerging Markets G Advanced Economies Emerging Markets 𝑥𝑥11 0.510 (0.917) 0.514 (0.900) 𝑥𝑥21 0.450 (0.818) 0.461 (0.864) 𝑥𝑥31 0.569 (0.879) 0.591 (0.899) 𝑥𝑥12 0.510 (0.918) 0.517 (0.905) 𝑥𝑥22 0.437 (0.794) 0.415 (0.778) 𝑥𝑥32 0.347 (0.536) 0.308 (0.468) 𝑥𝑥13 0.420 (0.756) 0.393 (0.688) 𝑥𝑥23 0.386 (0.701) 0.417 (0.782) 𝑥𝑥33 0.384 (0.594) 0.363 (0.551) 𝑥𝑥24 0.396 (0.719) 0.399 (0.748) 𝑤𝑤11 0.283 0.293 𝑤𝑤21 0.248 0.246 𝑤𝑤31 0.368 0.380 𝑤𝑤12 0.283 0.295 𝑤𝑤22 0.241 0.221 𝑤𝑤32 0.224 0.193 𝑤𝑤13 0.233 0.224 𝑤𝑤23 0.213 0.222 𝑤𝑤33 0.249 0.239 𝑤𝑤24 0.218 0.213 Note: 𝑥𝑥 stands for coefficient for Factor, 𝑤𝑤 stands for weight value. Factors loadings are given in parentheses. This is the results from calculation for countries in advanced economies and emerging markets. The real value of all parameters are calculated by the estimation for each country’s PCA, but the reports of estimation results for 16 cases are omitted. A Study on the Role of Economic and Institutional Environment on the Corporate Responsibility Performance and its Synchronization 475 ⓒ 2024 East Asian Economic Review In general, every component of two pillars, the Environment (E) and Social (S) is fairly distributed. There is no big difference of coefficients of two pillars between advance economies and emerging markets, thus, the weighted values are fairly distributed. However, there is a significant difference in the case of the other pillar, Corporate Governance (G) whose weighted value of 𝑤𝑤31 is relatively high, that is stockholders’ management. And there are differences of coefficients and weighted values of Corporate Governance (G) between two groups. Based on the investigated data regarding companies’ ESG score, this paper estimates the integrated ESG index (IESG) of companies in two groups from 16 countries using equation 1 and 2, the following table shows the results of this calculation. Table 5. Estimation Results of IESG ESG Environment (E) Social (S) Corporate Governance (G) Advanced Economies (2,566 companies) 0.453 0.412 0.493 0.526 Emerging Markets (528 companies) 0.399 0.359 0.398 0.439 Note: Average values from 2011-2022. The result of calculating 2,566 companies in advanced economies shows that the average integrated ESG index over 12 years is 0.453, a value that does not exceed 0.5. Among all pillars of the of Environment (E), Social (S), and Corporate Governance (G), performance in Environment (E) pillar is relatively low. However the performance in Corporate Governance (G) pillar is more than 0.5. In the case of 528 companies in emerging markets, the performance of IESG is 0.399, a value that less than the emerging markets’ companies are less than 0.5 in all three areas, and the calculated values show results in the order of Corporate Governance (G) > Social (S) > Environment (E). The following figure shows the trend of actual ESG score and the estimated Index (IESG) over the past decade. 476 Jong-Hee Kim ⓒ Korea Institute for International Economic Policy Figure1. ESG Index (IESG) Trend Companies in advanced economies have been maintaining a gradually increasing growth pattern, while the companies in emerging markets have been rapidly increasing their performance. In the case of companies in advanced economies, the ESG performance is not significantly changed by 2015, then it grows gradually beginning in 2016. The companies’ ESG performance in emerging markets originally shows a figure that is significantly low compared to the companies’ performance in advanced economies. However, it grows rapidly beginning in 2016, and by 2022 shows similar performance to that of the companies in advanced economies. It is interesting to note that the ESG performance in both has improved since 2016, which has been similar value between both groups. As described above, using the integrated ESG index, which is calculated from the actual score of ESG, this paper estimates the relationship between ESG performance of individual companies and the economic, financial, and institutional variables of the country. The following table shows the results of this estimation by using the equation 4. First, the growth rate of GDP per capita (∆𝑦𝑦𝑖𝑖,𝑡𝑡) has a positive effect on the ESG performance of 528 companies in emerging markets, while it has no significance in 2,566 companies in advanced economies. The growth rate of labor force participation rate (∆𝑙𝑙𝑖𝑖,𝑡𝑡) have a positive effect on the ESG performance in both groups, but the growth rate of industry, value added to GDP ratio (∆𝐼𝐼𝑖𝑖,𝑡𝑡) has a positive significance with the ESG performance only in the companies in emerging markets. In the case of 0.425 0.513 0.314 0.488 0.200 0.250 0.300 0.350 0.400 0.450 0.500 0.550 0.600 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Advanced Economies Emerging Markets A Study on the Role of Economic and Institutional Environment on the Corporate Responsibility Performance and its Synchronization 477 ⓒ 2024 East Asian Economic Review interest rate (∆𝑖𝑖𝑖𝑖,𝑡𝑡), its significance is weak in both groups. The difference significance of the growth rate of GDP per capita in both groups can be interpreted is that if a company is in the development stage, investment resulting from economic growth in the country can positively affect ESG. However, if the company is in a mature state of Table 6. Estimation Results according to Companies of Factors Determining ESG Dep. V. ∆𝐼𝐼𝐸𝐸𝑆𝑆𝐺𝐺𝑖𝑖,𝑡𝑡 𝑘𝑘 Classification Advanced Economies (2,566 companies) Emerging Markets (528 companies) ∆𝑦𝑦𝑖𝑖,𝑡𝑡 0.014 (0.002) 0.035 (0.046)*** ∆𝑙𝑙𝑖𝑖,𝑡𝑡 0.036 (0.015)*** 0.067 (0.017)*** ∆𝐼𝐼𝑖𝑖,𝑡𝑡 0.003 (0.008) 0.061 (0.014)*** ∆𝑖𝑖𝑖𝑖,𝑡𝑡 0.043 (0.014)* 0.028 (0.014)* ∆𝐹𝐹𝐹𝐹𝐼𝐼𝑖𝑖,𝑡𝑡 0.003 (0.001) 0.077 (0.027)*** ∆𝑦𝑦𝑖𝑖,𝑡𝑡 0.029 (0.037) 0.139 (0.010)*** ∆𝑃𝑃𝐹𝐹𝑖𝑖,𝑡𝑡 0.206 (0.009)*** 0.149 (0.009) ∆𝑟𝑟𝑖𝑖,𝑡𝑡 0.081 (0.033)*** 0.071 (0.062) ∆𝐶𝐶𝐶𝐶𝑖𝑖,𝑡𝑡 0.087 (0.083)** 0.495 (0.155)*** ∆𝑅𝑅𝑅𝑅𝑖𝑖,𝑡𝑡 0.225 (0.077)*** 0.418 (0.183)*** ∆𝐺𝐺𝐸𝐸𝑖𝑖,𝑡𝑡 0.218 (0.064)*** 0.167 (0.121) ∆𝑉𝑉𝑉𝑉𝑖𝑖,𝑡𝑡 0.331 (0.119)*** 0.642 (0.143)*** C 0.159 (0.065)*** 0.180 (0.026)*** Panel Obs. 24,061 5,310 R-squared 0.144 0.157 Notes: Panel OLS (fixed effect). Standard errors are given in parentheses. + significant at 10 percent, * significant at 5 percent, ** significant at 1 percent. 478 Jong-Hee Kim ⓒ Korea Institute for International Economic Policy development, investment from economic growth does not necessarily have a positive effect on ESG. In the case of financial variables, the size of foreign direct investment (∆𝐹𝐹𝐹𝐹𝐼𝐼𝑖𝑖,𝑡𝑡) and bank z-score (∆𝑦𝑦𝑖𝑖,𝑡𝑡) which is related to the bank’s stability have a positive effect on ESG performance of companies in emerging markets. There are no significances in the companies of advanced economies. On the contrary, the growth rate of pension fund assets to GDP ratio (∆𝑃𝑃𝐹𝐹𝑖𝑖,𝑡𝑡) and stock market return rate (∆𝑟𝑟𝑖𝑖,𝑡𝑡) have a strong positive effect on the ESG performance of the companies in advanced economies, while they have no significances in the companies in emerging market. The positive relationship between ESG and foreign direct investment in companies of emerging markets can also be interpreted in connection with the increase in foreign share ownership of the company. For example, if the share ownership by foreigners in a particular company increases, the governance structure of the company, that is, the transparency of the board of directors and the protection of shareholder rights, can be strengthened. And the strong positive impact of the growth rate of pension fund assets to GDP ratio on the ESG performance of companies in advanced economies, which contains advanced companies for social responsibility implies that institutional investors can play an important role of in the social responsibility investment. In comparison to this, the government institutional indexes show a clear significance in both groups. All four variables such as the growth rate of corruption control (∆𝐶𝐶𝐶𝐶𝑖𝑖,𝑡𝑡), rule of law (∆𝑅𝑅𝑅𝑅𝑖𝑖,𝑡𝑡), government effectiveness (∆𝐺𝐺𝐸𝐸𝑖𝑖,𝑡𝑡), and citizens’ voice and accountability (∆𝑉𝑉𝑉𝑉𝑖𝑖,𝑡𝑡) have a positive effect on the ESG performance of companies in both. Among them, the significance of citizens’ voice and accountability is the highest. A point of interest is the companies’ ESG performance and its relationship with the institutional variables which contain information about the government’s policies and institutions. They have a particularly large positive effect on the companies in emerging markets. The next step is for the analysis of classifying grades of ESG. As it mentioned earlier in part of model explanation, in this paper, a total of 3,094 companies ESG performance is compared over the period of 12 years, from 2011 to 2022. Each company is classified according to the degree of the increase in ESG performance, and the characteristics of ESG performance were then compared with this. The following table shows the characteristics of the companies classified in this way. A Study on the Role of Economic and Institutional Environment on the Corporate Responsibility Performance and its Synchronization 479 ⓒ 2024 East Asian Economic Review Table 7. Classifying Results according to the Companies’ Average ESG Grade Country A grade B grade C grade D grade Advanced Economies (2,566 companies) 214 companies (8.3%) 844 companies (32.9%) 1,140 companies (44.4%) 358 companies (14.0%) Australia 15 58 132 75 France 28 47 11 0 Germany 24 33 22 6 Japan 21 170 139 77 Sweden 15 28 13 3 Switzerland 12 16 21 6 United Kingdom 33 128 114 22 United States 66 364 688 169 Emerging Markets (528 companies) 35 companies (6.6%) 193 companies (36.6%) 230 companies (43.6%) 70 companies (13.3%) China 0 19 63 15 Hong Kong 1 25 31 1 India 9 36 49 3 Indonesia 2 17 14 5 Malaysia 1 17 28 5 Singapore 1 14 14 8 South Korea 18 45 21 32 Thailand 3 20 10 1 Note: Average values from 2011-2022. In the case of 2,566 companies in advanced economies, 214 companies show an average A grade over the period of over the period of 12 years, from 2011 to 2022, and its ratio is about 8.3%. And 358 companies have an average D grade (14.0%) over the same period, so that the ratio of an average C or D grades is about 58.4%. The similar result is found in the 528 companies in emerging markets. 35 companies (6.6%) records an average A grade over the period of 12 years, from 2011 to 2022, while about 13.3% (70 companies) of the entire companies records D grade over the same period. As a result, 300 companies show an average C or D grade, which is 56.8% of whole companies in emerging markets. The following figure shows the trends of the companies’ average ESG grade in both groups. 480 Jong-Hee Kim ⓒ Korea Institute for International Economic Policy Figure 2. ESG Index (IESG) Trend by Classifying Companies’ average ESG Grades Grade A Grade B Grade C Grade D The trend in each grade shows different pattern between two groups. In the case of the companies in grade A, the companies’ ESG performance in advanced economies originally shows a figure that is relatively low compared to the companies’ performance in emerging markets. However it grows gradually, and by 2022 shows a higher performance than that of the companies in emerging markets. This trend also appears in the performances of the companies in grade B. The companies’ performance in advanced economies have been maintaining a gradually increasing growth pattern, and by 2022 shows a similar performance to that of the companies in emerging markets. In the case of the companies in grade D, the trend shows a particularly opposite pattern to the previous trends in grade A and B. The companies’ performance in emerging markets shows a figure that is relatively low compared to the companies’ performance in advanced economies. However, it has improved significantly since 2016, which has recently been higher than that of the companies in advanced economies. In the case of the companies in grade C, the companies in emerging markets have been rapidly increasing their ESG performance since the beginning in 2011, and by 2022 shows a particular higher than that of the companies in advanced economies. A Study on the Role of Economic and Institutional Environment on the Corporate Responsibility Performance and its Synchronization 481 ⓒ 2024 East Asian Economic Review Using the above method of classification, the relationship between companies’ ESG performance and its determinants is then estimated. The results of these estimations are displayed in the following table. Table 8. Estimation Results for Deciding Factors of ESG by Classifying Companies’ Average ESG Grade Dep. V. ∆𝐼𝐼𝐸𝐸𝑆𝑆𝐺𝐺 𝑖𝑖,𝑡𝑡 𝑘𝑘 Classification Advanced Economies (2,566 companies) Emerging Markets (528 companies) Grade A grade (214) B grade (844) C grade (1,140) D grade (358) A grade (35) B grade (193) C grade (230) D grade (70) ∆𝑦𝑦 𝑖𝑖,𝑡𝑡 0.019 (0.006) -0.013 (0.003) 0.019 (0.038) -0.010 (0.005)* 0.014 (0.016) 0.003 (0.008)*** 0.049 (0.007)*** 0.017 (0.012)*** ∆𝑙𝑙 𝑖𝑖,𝑡𝑡 0.060 (0.043) 0.055 (0.026) 0.081 (0.025)*** 0.069 (0.030)** 0.031 (0.070)*** 0.085 (0.030)*** 0.040 (0.025)*** 0.083 (0.042)*** ∆𝐼𝐼 𝑖𝑖,𝑡𝑡 0.059 (0.031)* 0.043 (0.016)*** 0.097 (0.013) 0.293 (0.014)** 0.074 (0.054)*** 0.058 (0.025)** 0.066 (0.023)*** 0.012 (0.030)*** ∆𝑖𝑖 𝑖𝑖,𝑡𝑡 0.014 (0.040) 0.097 (0.025)*** 0.047 (0.023)** 0.048 (0.032) 0.092 (0.059)* 0.018 (0.025) 0.029 (0.021)*** 0.043 (0.032) ∆𝐹𝐹𝐹𝐹𝐼𝐼 𝑖𝑖,𝑡𝑡 -0.002 (0.002) -0.007 (0.002) 0.063 (0.019) -0.008 (0.003) 0.004 (0.015) 0.037 (0.004)*** 0.107 (0.004)*** 0.094 (0.009)*** ∆𝑦𝑦 𝑖𝑖,𝑡𝑡 0.011 (0.009) 0.010 (0.006) 0.040 (0.064) 0.039 (0.010)*** 0.038 (0.049) 0.019 (0.015)*** 0.095 (0.015)*** 0.012 (0.021)*** ∆𝑃𝑃𝐹𝐹 𝑖𝑖,𝑡𝑡 0.053 (0.030)*** 0.034 (0.016)** 0.072 (0.014)*** 0.156 (0.018)*** -0.020 (0.043) 0.019 (0.015) 0.012 (0.014) 0.015 (0.024) ∆𝑟𝑟 𝑖𝑖,𝑡𝑡 0.029 (0.010)*** 0.036 (0.058)*** 0.006 (0.005) -0.002 (0.006) 0.002 (0.003) 0.008 (0.002) 0.012 (0.009) -0.002 (0.012)* ∆𝐶𝐶𝐶𝐶 𝑖𝑖,𝑡𝑡 0.248 (0.236)*** 0.171 (0.145)*** 0.263 (0.138)*** 0.500 (0.186)*** 0.054 (0.055)*** 0.376 (0.273)*** 0.486 (0.243)*** 0.639 (0.314)*** ∆𝑅𝑅𝑅𝑅 𝑖𝑖,𝑡𝑡 0.055 (0.022) 0.117 (0.132)*** 0.262 (0.129)*** 0.270 (0.186)* 0.087 (0.054)*** 0.410 (0.308)*** 0.425 (0.312)*** 0.398 (0.347)*** ∆𝐺𝐺𝐸𝐸 𝑖𝑖,𝑡𝑡 0.325 (0.214)*** 0.011 (0.011) 0.366 (0.106)*** 0.377 (0.126)*** 0.408 (0.384)*** 0.339 (0.210)*** 0.050 (0.192) 0.546 (0.271)*** ∆𝑉𝑉𝑉𝑉 𝑖𝑖,𝑡𝑡 0.372 (0.365)*** 0.349 (0.219)*** 0.376 (0.187)*** 0.368 (0.234)*** 0.378 (0.430)*** 0.419 (0.228)*** 0.475 (0.230)*** 0.540 (0.375)*** C 0.097 (0.020)*** 0.173 (0.011)*** 0.190 (0.010)*** 0.053 (0.135)*** 0.103 (0.092) 0.163 (0.042)*** 0.219 (0.040)*** 0.138 (0.066)** Panel Obs. 2,308 8,643 10,035 3,075 371 1,971 2,301 667 R-squared 0.128 0.123 0.227 0.147 0.385 0.171 0.259 0.244 Notes: Panel OLS (fixed effect). Standard errors are given in parentheses. + significant at 10 percent, * significant at 5 percent, ** significant at 1 percent. 482 Jong-Hee Kim ⓒ Korea Institute for International Economic Policy The significance of companies’ ESG performance and its relationship with the country’s economy and institutional environment can be seen primarily in two groups of companies. There are companies that have shown a grade A in their ESG performance, including those companies that have shown a grade B in their values. In the case of the companies in emerging markets, the positive relationship between GDP per capita (∆𝑦𝑦𝑖𝑖,𝑡𝑡) and ESG can be seen in companies that have shown a grade D, while the significance is relative weak in the companies in advanced economies. The positive significances of labor force participation rate (∆𝑙𝑙𝑖𝑖,𝑡𝑡) and industry, value added to GDP ratio (∆𝐼𝐼𝑖𝑖,𝑡𝑡) with ESG are found in the companies that have shown a grade A and D in emerging markets. However it is only found in the companies that have shown a grade D in advanced economies. As predicted, the clear difference between two groups is found in financial variables, foreign direct investment (∆𝐹𝐹𝐹𝐹𝐼𝐼𝑖𝑖,𝑡𝑡), pension fund assets to GDP ratio (∆𝑃𝑃𝐹𝐹𝑖𝑖,𝑡𝑡) and stock market return rate (∆𝑟𝑟𝑖𝑖,𝑡𝑡). In the case of foreign direct investment (∆𝐹𝐹𝐹𝐹𝐼𝐼𝑖𝑖,𝑡𝑡), it is found that ESG performance improved in companies that showed a grade B, C, and D in emerging markets, while there is no significance in the companies in advanced economies. On the contrary, the positive significances of pension fund assets to GDP ratio (∆𝑃𝑃𝐹𝐹𝑖𝑖,𝑡𝑡) and stock market return rate (∆𝑟𝑟𝑖𝑖,𝑡𝑡) are found in companies of advanced economies. Pension fund assets to GDP ratio (∆𝑃𝑃𝐹𝐹𝑖𝑖,𝑡𝑡) has a strong positive effect on the companies’ ESG performance of all grades, while there is no significance in the companies in emerging markets. And in the case of stock market return rate (∆𝑟𝑟𝑖𝑖,𝑡𝑡), there is a positive relationship found only between companies with a grade A and B. The institutional Indexes, which refer to government policy and the country’s institutional environment, show a positive relationship with all grades of companies’ ESG performance in both group. However no significance is found in the rule of law (∆𝑅𝑅𝑅𝑅𝑖𝑖,𝑡𝑡) of the companies with A, and in the government effectiveness (∆𝐺𝐺𝐸𝐸𝑖𝑖,𝑡𝑡) of the companies with B in advanced economies. Between two groups, one can see that the positive relationship is stronger in the companies in emerging markets. Specifically, the significances of corruption control (∆𝐶𝐶𝐶𝐶𝑖𝑖,𝑡𝑡) and citizens’ voice and accountability (∆𝑉𝑉𝑉𝑉𝑖𝑖,𝑡𝑡) are still strong in the companies in emerging markets. Among these variables, one can see that the positive relationship is stronger in companies with grades that shows a relative low. This result can be interpreted in various ways, but in connection with the previous results, it can be said that companies whose ESG performance has declined significantly A Study on the Role of Economic and Institutional Environment on the Corporate Responsibility Performance and its Synchronization 489 ⓒ 2024 East Asian Economic Review social responsibility and shareholder value: An empirical test of the risk management hypothesis.” Strategic Management Journal, vol. 30, pp. 425-445. Gregory, A., Whittaker, J., and X. Yan. 2016. “Corporate Social Performance, Competitive Advantage, Earnings Persistence and Firm Value.” Journal of Business Finance & Accounting, vol. 43, no. 1, pp. 3-30. Gugler, K., Mueller, D. C., and B. B. Yurtoglu. 2008. “Insider ownership, ownership concentration and investment performance: An international comparison.” Journal of Corporate Finance, vol. 14, pp. 688-705. Hatch, M. J. and P. H. Mirvis. 2009. “Designing a positive image: corporate branding and Social responsibility.” Advances in Appreciative Inquiry, vol. 3, pp. 35-55. Lin, C. H., Yang, H. L., and D. Y. Liou. 2009. “The Impact of corporate Social Responsibility on Financial Performance: Evidence From Business in Taiwan.” Technology in Society, vol. 31, pp. 56-63. Nelling, E. and E. Webb. 2009. “Corporate social responsibility and financial performance: the ‘vicious cycle’ revisited.” Review of Quantitative Finance and Accounting, vol. 32, no. 2, pp. 197-209. Nollet, J., Filis, G., and E. Mitrokostas. 2016. “Corporate Social Responsibility and Financial Performance: A Non-linear and Disaggregated Approach.” Economic Modelling, vol. 52(B), pp. 400-407. Orlitzky, M., Schmidt, F. L., and S. L. Rynes. 2003. “Corporate Social and Financial Performance: A Meta-Analysis.” Organization Studies, vol. 24, pp. 403-441. Palmer, K., Oates, W.E., P.R. Portey. 1995. “Tightening environmental standards: the benefit-cost or the no-cost paradigm?” Journal of Economic Perspectives, vol. 9, no. 1, pp. 119-132. Sarma, M. 2008. “Index of Financial Inclusion.” ICRIER Working Paper, no. 215. Skouloudis, A. 2014. “Revisiting the National Corporate Social Responsibility Index.” MPRA working paper, pp. 1-23. Yamaguchi, K. 2008. “Static and Dynamic Return On Corporate Environmental Investment Activity: Empirical Evidence From Japan.” CSR Paper, vol. 36, pp. 1-12. First version received on December 9, 2024 Peer-reviewed version received on December 21, 2024 Final version accepted on December 23, 2024 © 2024 EAER articles are distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution, and reproduction in any medium, provided you give appropriate credit to the original author(s) and the source, and provide a link to the Creative Commons license.