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ESG performance and economic growth: a panel co-integration analysis

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DOI: 10.1007/s10663-021-09508-7

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Empirica
https://doi.org/10.1007/s10663-021-09508-7

ORIGINAL PAPER

ESG performance and economic growth: a panel

co‑integration analysis

Marc‑Arthur Diaye1 · Sy‑Hoa Ho2 · Rim Oueghlissi3

Accepted: 16 March 2021

© The Author(s), under exclusive licence to Springer Science+Business Media, LLC, part of Springer Nature
2021

Abstract
How important a good ESG performance is for GDP per capita? In this paper we
examine the economic effect of environmental, social and governance (ESG) per‑
formance in 29 OECD countries over the 1996–2014 period, using panel cointegra‑
tion techniques. The application of cointegration methodology allows distinguishing
between long run and short run effects. We find that, while there is a positive rela‑
tionship between ESG and GDP per capita in the long run, such relationship does
not exist in the short run. However when allowing for heterogeneity in the short
term dynamics (Pooled Mean Group), two countries (Iceland and South Korea) ben‑
efit in the short run (w.r.t. GDP per capita) from their ESG performance.

Keywords ESG · GDP per capita · Panel cointegration estimation

JEL Classification Q01 · O40 · E02 · C23 · C22

Responsible Editor: Fritz Breuss.

* Marc‑Arthur Diaye
marc-arthur.diaye@univ-paris1.fr
Sy‑Hoa Ho
hosyhoa1@duytan.edu.vn
Rim Oueghlissi
rim.oueghlissi@gmail.com
1
Sorbonne Center of Economics, University Paris 1 Pantheon-Sorbonne, Paris, France
2
Institute of Research and Development, Duy-Tan University, Da Nang, Vietnam
3
MASE Research Unit, University of Jendouba, Jendouba, Tunisia

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Vol.:(0123456789)
 Empirica

1 Introduction

The country’s ability to safeguard the needs of its future generations through the
protection of environment and the promotion of a broader range of social and
governance objectives, the so-called “country’s ESG performance ”, has been
depicted as causing differences in economic growth across countries. More pre‑
cisely, countries having a good ESG performance would achieve a higher eco‑
nomic growth (by promoting, more efficient use of natural resources, more pro‑
ductive and faster implementation of social and economic policies). For instance,
research on the environmental performance, emanating from green growth theory
(Stern 2007; Nordhaus 2008; Jacobs 2013) support a point of view in favor of a
positive relationship between environmental performance and economic growth.
Cracolici et al. (2010) and Stern et al. (2015) reach the same conclusion con‑
cerning countries social performance; and finally as for governance performance,
North (1990), Hall and Jones (1999) and Alam et al. (2017) argue that efficient
government institutions foster economic growth.
However, despite the fact that the role of ESG factors is well recognized, evi‑
dence from empirical works is not always supportive to its positive effect on
growth. Indeed while one group of papers presents empirical evidence that a good
ESG performance stimulates economic growth (Hall and Jones 1999; Stern 2007;
Stern et al. 2015; Nordhaus 2008; Cracolici et al. 2010; Jacobs 2013; Alam et al.
2017), another group of papers casts doubt over the positive effect of ESG perfor‑
mance (Schneider et al. 2010; Murtin et al. 2011; Howarth 2012). Typically, they
argue that ESG performance might impede growth.
The underlying arguments in favor of the negative link between ESG and
economic growth can broadly be categorized in two groups. The first one draws
from the “degrowth”theory (Schneider et al. 2010; Howarth 2012) and posits that
the achievement of ESG objectives and policies can endorse a downscaling of
consumption and production, which implies a contraction of economic growth.
For instance, according to this literature, the production of goods and services
requires energy; therefore, cutting energy use or shifting toward higher-cost forms
of energy necessarily threatens to reduce the growth of economic output. The
second group of arguments (used to support a negative link between ESG perfor‑
mance and economic growth) is related to social comparison and envy theory. It
suggests that social comparison based on the existence and promotion of peoples’
lifestyles, has been responsible for social and environmental crises. The struggles
for enhancing well-being or raising social justice could easily become a source of
growth decrease, together with many other movements for environmental justice.
Murtin et al. (2011) elaborate on this idea by indicating that ESG performance
incites distributional conflicts. In other words, after a government implements
administrative extensions of collective wage agreements or unemployment ben‑
efits, it will set labor costs at too-high levels for some employers and this may
harm competition and productivity, reducing consequently growth.
Hence, no clear-cut consensus exists in the literature about the relationship
between countries ESG performance and economic growth. It is noteworthy that

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the above arguments substantiating the linkages between ESG factors and eco‑
nomic development have not made an explicit distinction between short term
and long term effects. This is all the more striking since these studies conclude
that CSR policies incur costs that irrelevant to performance for the firm (Levitt
1958). This is especially true in the short term (Horváthová 2012), when a good
CSR performance implies additional costs, although performance benefits from
CSR may emerge in the long term (Lioui and Sharma 2012; García-Sánchez and
Prado-Lorenzo 2012).
At least four reasons may explain the need to distinguish between long-run and
short-run effects. The first one is related to the fact that ESG factors have indirect
and multi-step nature that leads to a time lag (i.e., the time interval between the
ESG factors impetus and its direct impact on economic growth). This period of time,
which is a non-economic time lag, is longer in comparison to an economic time lag.
The second reason is connected to the substitutional nature of ESG factors influence
during different time periods. By substitutional influence, we mean the possibility
that the link between some ESG factors and economic growth may originate in the
fact that others ESG factors take action. For example, change in political regime will
have only a temporary impact on growth, but its potential effect on development
will be persistent when associated to corruption, which in turn determines growth.
It seems, therefore, important to focus on the economic effects of ESG performance
taking into account the temporal horizon. The third reason is that ESG can be con‑
sidered as a long-term concept, while economic growth is partly1 a short-term one.
As a consequence, a classical regression aiming at explaining countries’ economic
growth (a short-term dependent variable) by their ESG performance (a long-term
explanatory variable), takes the risk of finding no relationship between the two vari‑
ables. For instance, in the literature about the effect of CSR on firms’ financial per‑
formance, most papers (McWilliams and Siegel 2000; Servaes and Tamayo 2013;
Pekovic and Vogt 2020) are careful to choose a long-term financial performance
(q-Tobin,...). The fourth reason is that, given its nature, it could be difficult to find
a link between the implementation of a particular country’s ESG policies over the
short term and the impact of these efforts. Over longer time horizons, large-scale
issues, such as climate change mitigation policies or resource use and management,
may have significant impacts on a country’s stability; and, consequently, this may
affect growth (Lydenberg 2009).
The objective of this paper is to shed light on the economic effect of ESG factors
at the country level, distinguishing between long term and short term effects. Our
paper is therefore focused on the macroeconomic level analysis of ESG while exist‑
ing literature is mainly oriented to the microeconomic level one. However working
on the macroeconomic level requires to use a specific econometric methodology.
More precisely, we use a panel cointegration methodology that has two main advan‑
tages. First, panel cointegration allows the coefficients of short run factors to differ
across countries, while the impact of long term factors remains the same. Second,

1
”Partly” because the economic growth strategy of many countries takes into account its effects on
future generations.

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panel cointegration allows to assess the speed of adjustment of economic growth to

their long term equilibrium level.
Using annual data for a sample of 29 OECD economies over the period
1996–2014 (19 years), we find evidence supporting that, on the average, there is no
short term relationship between nations’ growth (GDP per capita) and their ESG
performance. However, a positive long term relationship does exist. When allow‑
ing for heterogeneity in the short term dynamics (Pooled Mean Group) in order to
make a short term analysis country by country, we find that the short term effects
are positive and significant (at the 5% level of significance) for only two countries:
Iceland and South Korea. To measure ESG performance, we focus on the ESG index
as provided by Capelle-Blancard et al. (2019). This index is a composite measure
of 18 different ESG indicators from reliable non-commercial providers, and thus,
reflects the country’s performance in terms of environmental, social and governance
issues. The ESG index is original and unusual as it takes a quantitative approach to
the extra-financial policies of a given country using a broad dataset.
The remainder of the paper is organized as follows. Section 2 presents the data,
details the methodology and provides some descriptive statistics. Section 3 shows
the empirical results and Sect. 4 concludes.

2 Hypotheses

The considerable attention given to ESG performance may be explained by the fact
that ESG factors help to explain movements in long-term growth and why some
countries grow faster than others. This logic can be supported theoretically and
empirically.
Theoretically, the first explanation is that ESG performance reveals the way a
country tackles output volatility, economic shocks and growth collapses (Sachs
2015; Capelle-Blancard et al. 2019). From this standpoint, a country’s natural and
social resources may have direct long-term economic impacts in that they act as a
buffer against negative economic shocks, with a consequently positive impact on
future growth. A second theoretical explanation (for a positive and a long-term
relationship between economic growth and ESG performance) is rooted in the
economists’ conception of positive and/or negative externalities which describe
the integration of ESG into macroeconomic policies as an essential tool to over‑
come market failure (Crifo and Forget 2015). Nevertheless, these policies cannot
be translated easily into market price, as they take into account issues related to a
long-term perspective. Examples of these issues include environmental taxation,
antitrust, prudential regulation, control of redistributive taxation and the regula‑
tion of network industries. From this perspective, ESG factors seem to be decisive
for long-term economic growth prospects. A third theoretical explanation comes
from the so-called endogenous growth model which states that long-term growth
is positively influenced by economic incentives. Endogenous growth theory
starts from the observation that production requires more than just direct invest‑
ment in physical capital and basic labour, but also investment in knowledge and
human capital, research and development (R&D) and in infrastructure. With this

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extended concept of capital, it is possible to relax the assumption of diminish‑

ing returns on capital. Accordingly, the long-term rate of growth becomes endog‑
enous, in the sense that it depends on investment decisions which, in turn, could
be influenced by several factors (Romer 1986; Lucas 1988). Economists have tra‑
ditionally focused on understanding the effect of economic factors on long-term
growth. Yet, from a more macro perspective, other theoretical approaches recog‑
nize that many non-economic factors interact with the economic growth process.
Examples of these are institutional economics (North 1990; Jütting 2003), eco‑
nomic sociology (Granovetter 1985; Knack and Keefer 1997), political science
(Lipset 1959) and demographics (Kalemli-Ozcan 2002). In this regard, there are
sound reasons for believing that ”ESG standards” may have positive effects on
economic growth performance in the long run.
Empirically, a positive and long-term relationship between countries’ economic
growth and some aspects (air pollution control, inequality, corruption) of their ESG
performance has been examined in the literature. For instance, Holland et al. (1999)
showed, in the case of EU policies, that air pollution control improves worker health
leading to reduced absenteeism from work for abatement costs of around 10% over
the period 1996–2010, thereby improving productivity and output. Halter et al.
(2014) argue that the positive and negative effects of inequality (an ESG factor) on
growth tend to cluster over different time frames. In particular, they observe that a
poor performance in terms of inequality has an effect that is mostly positive in the
short run because economic mechanisms dominate over this time frame, but this
effect becomes mostly negative in the long run as social and political mechanisms
predominate at this level. Ugur (2014), using meta-analysis, and based on studies
focusing on institutional quality, such as those of Kaufmann et al. (2007) and Gwart‑
ney et al. (2004), concludes that there is a negative link between corruption and eco‑
nomic growth in the long-run. The author argues that averaging the effects of cor‑
ruption over the time periods indicates that the adverse effects on per-capita GDP in
the short term are outweighed by the beneficial effects in the long term.
The OECD (2012) report on ”Green Growth and Developing Countries” recog‑
nizes the relevance of ESG issues for long term economic growth. In particular, the
report argues that, while ESG policies are likely to deliver local benefits in the short
run, initial implementation costs could curb economic development, thus dissuading
many countries from incorporating them into their country’s current development
plan. The report concludes that the economic effects of ESG activities may emerge
in the long run, in particular, although in the short run they are sources of cost and
may work against growth. Recently, an increasing number of papers point out the
decisive role played by ESG factors in the prospects for long-term economic growth.
These papers try to supplement the traditional approach to national economic devel‑
opment, by examining, for instance, a country’s creditworthiness (Margaretic and
Pouget 2018; Capelle-Blancard et al. 2019), risk exposure (Schieler 2019) and readi‑
ness and ability to address risks and build an investment-friendly environment for
long-term prosperity (Hörter 2017).
The literature seems to imply that countries with a good ESG performance should
have higher economic growth in the long-term, while the effect in the short-term is
less clear. This leads to the following hypotheses:

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Hypothesis 1 In the long-term, there is a positive link between good ESG perfor‑
mance and economic growth.

Hypothesis 2 In the short-term, there is a negative or nonexistent link between

good ESG performance and economic growth.

3 Datasets and econometric model

3.1 The two main variables

We use a panel dataset from2 1996 to 2014 and 29 OECD countries: Australia, Aus‑
tria, Belgium, Canada, Switzerland, Germany, Denmark, Spain, Finland, France,
UK, Greece, Ireland, Italy, Japan, Netherlands, Norway, New Zealand, Portugal,
Sweden, Poland, Turkey, United States, Czech Republic, Hungary, Iceland, South
Korea, Luxembourg and Mexico.
We use as a dependent variable the GDP per capita and as an explanatory vari‑
able, the ESG index. Even if (inflation-adjusted) GDP is the most popular indicator
for economic growth in the literature, it is not the only one. For instance, employ‑
ment indicators may also be used. We chose the traditional (inflation-adjusted) GDP
mainly because it allows us to compare our results with other results in the litera‑
ture. Moreover, let us remark that the use of economic growth indicators like HDI
(Human Development Indicator) would lead to a tautological link between ESG and
economic growth, since the some of the criteria used for the construction of HDI
and ESG are the same.
The figures regarding GDP per capita (in thousand Euro, constant 2010 Euro) are
taken from the AMECO macro-economic database, except Turkey whose GDP per
capita figures are taken from World Bank database. The figures regarding the ESG
index are taken from a database set up by Capelle-Blancard et al. (2019). This data‑
base is constructed from reports by extra-financial rating agencies (VIGEO, MSCI)
and by asset management funds (HSBC AM, Natixis AM, Neuberger Bermans).
From these reports, Capelle-Blancard et al. (2019) select some ESG related items
(see Table 1) and compute the ESG index using the Principal Component Analysis
methodology. This ESG index assesses the performance of a country in terms of
environmental, social and governance issues and can be interpreted as a measure‑
ment of the extra-financial performance of a given country. The descriptive statistics
concerning our two main variables can be obtained in the Appendix.

3.2 Econometric model

Due to the dynamic nature of the data set, we first address the stationarity issue
by performing some panel data unit root tests. Then, a cointegration analysis is

2
Bassanini and Scarpetta (2003) use also a 19 year period panel dataset to analyse the long run determi‑
nants of economic growth in OECD countries.

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Table 1  Items used to assess ESG performance

Dimension Measuring items Code Source

Environmental Air quality Control air pollution Air WDI

Water and sanitation Waste water treatment Waste WDI
Forests Forest area (% of land area) Forest WDI
Renewable energy Combustible renewable and waste (% of total energy) Combustible WDI
Renewable electricity output (% of total electricity) Electricity WDI
Renewable energy consumption (% of total energy) Energy WDI
Social Human capital School enrollment, secondary (% gross) Enrollsec WDI
Demography Life expectancy Life WDI
Health Health expenditure, public (% of total health expenditure) Health WDI
Employment Non-vulnerable employment, total (% of total employment) Nonvulnerable WDI
Gender equality Ratio of female to male labor force participation rate (%) Female to male WDI
Gender Parity Index GPI WDI
Governance Democratic-institution Control of corruption Corruption WGI
Rule of law Rule WGI
Voice and accountability Voice WGI
Safety policy Country effectiveness Effectiveness WGI
Political stability Stability WGI
Regulatory quality Regulatory WGI

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conducted to examine whether the variables are cointegrated. Finally, an estimation

of long term and short term relationship is performed.
Here, we assume that the GDP per capita function in the long run is given by:
GDPCi,t = 𝛼0t + 𝛼t ESGIi,t + 𝜇i + 𝜀i,t (1)
where GDPC is the GDP per capita (in the long run); ESGI is the ESG index;
i = 1, 2, … , N (countries); t = 1, 2 … T (periods); 𝜇i is the group-specific effect.
We assume that both variables are I(1) and co-integrated for individual countries,
leading the error term to be an I(0) process for all i.
The ARDL(1,1) dynamic panel specification of Eq. (1) is:
GDPCi,t = 𝜇i + 𝜆i GDPCi,t−1 + 𝛿0,i ESGIi,t + 𝛿1,i ESGIi,t−1 + ui,t (2)
The below Eq. (3) permits to get the error correction (ec) of Eq. (2):
GDPCi,t − GDPCi,t−1 = [𝜇i − (GDPCi,t−1 − 𝜆i GDPCi,t−1 )
(3)
+ (𝛿1i ESGIi,t + 𝛿0,i ESGIi,t )] − (𝛿1i ESGIi,t − 𝛿1,i ESGIi,t−1 ) + ui,t

Then, we obtain:
𝛥GDPCi,t = 𝜙i (GDPCi,t−1 − 𝛼0,i − 𝛼i ESGIi,t ) − 𝛿1,i 𝛥ESGI,it + ui,t (4)
where 𝜙i = −(1 − 𝜆i ), 𝛼0,i = 𝜇i ∕(1 − 𝜆i ), 𝛼i = (𝛿0,i + 𝛿1,i )∕(1 − 𝜆i ).
The error-correction of adjustment parameter is 𝜙i , the long term coefficients are
𝛼i for ESGIi,t respectively, and the short term coefficients are 𝛿1i . In long term equi‑
librium, the coefficient of error-correction phii must be negative and significant.
In order to test Panel cointegration estimation from Eq. (4), we can use three esti‑
mators including Mean Group (MG) proposed by Pesaran and Smith (1995), Pooled
Mean Group (PMG) developed by Pesaran et al. (1999) and Dynamic Fixed Effect
(DFE). The MG will produce consistent estimates of the average of the parameters.
The PMG allows for the intercept, the short term coefficients and the error variances
to be heterogeneous across countries; it allows also for common long term coeffi‑
cients for all countries. Finally the DFE imposes the short term coefficient to be
homogeneous.

4 Empirical results

4.1 Cross‑sectional dependence test and unit root test

Firstly, we verify the Pesaran and Friendman’s test cross-sectional independence of

panel data. The cross-sectional dependence test (CD test) takes cross sectional inde‑
pendence as the null hypothesis. The results are reported in Table 2, suggesting that
there is a strong evidence of a cross-sectional dependence between GDPC and ESGI
under the Fixed and Random Effects specification.
Secondly, we perform the first generation of panel unit root tests, called LLC test
and IPS test, respectively introduced by Levin et al. (2002) and Im et al. (2003).

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Table 2  Test of cross sectional Variable Fixed effect Random effect

independence
ESGI 1.373*** 1.297***
(0.140) (0.115)
Constant − 65.529*** − 60.231***
(9.840) (8.312)
Pesaran’s test of 21.177*** [0.000] 22.020*** [0.000]
cross sectional
independence
Friedman’s test of 138.656*** [0.000]
cross sectional
independence

Standard errors in parentheses. P values of tests are reported in

brackets [ ]. ***Significant at the 1% level

Table 3  Panel unit root tests for LLC IPS CIPS

GDPC and ESGI
GDPC 0.205 0.5494 − 2.014
ESGI − 1.164 − 0.693 − 2.164
𝛥GDPC − 12.648*** − 10.052*** − 3.925***
𝛥ESGI − 14.708*** − 15.023*** − 4.505***

𝛥 is first difference, ***, **, * mean that we reject the null hypoth‑
esis of unit root at the 1%, 5%, 10% level

Then, we apply the second generation of panel unit root test of Pesaran (2007) that
allows for cross section dependence (CIPS). The null hypothesis is that the series
contains a unit root. The panel unit root tests are shown in Table 3 for both variables
in level and in first difference.
From Table 3, we observe that the variables GDPC, and ESGI are not station‑
ary according to LLC and IPS. However 𝛥GDPC and 𝛥ESGI are stationary, regard‑
less of the test, indicating that GDPC and ESGI are integrated with the same order
I(1). Therefore, we can test for the existence of a cointegration relationship between
GDPC and ESGI.

4.2 Cointegration test

To this purpose, we use the panel cointegration tests proposed by Pedroni (1999)
and Westerlund (2007). Let us remind that Pedroni (1999) introduces seven statis‑
tics : four statistics are based the within-dimension of the dataset (Panel-v, Panel-𝜌,
Panel-PP, Panel-ADF) and the other three, on the between-dimension (Group 𝜌-sta‑
tistic, Group PP-statistic, Group ADF-statistic). The Westerlund (2007) test is based
on four mean group statistics: Gt, Ga, Pt and Pa. We use additional tests like the Kao
(1999) test which is performed over the residual estimation based on Augmented
Dickey–Fuller test; and the Banerjee and Carrion-i Silvestre (2017) test which is

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Table 4  Panel cointegration test: Pedroni test

Pedroni (1999) Statistic Prob. Weighted statistic Prob.

Panel-v 0.707 0.239 − 0.608 0.728

Panel-𝜌 − 1.130 0.129 − 1.043 0.148
Panel-PP − 3.475*** 0.0003 − 3.310 0.000
Panel-ADF − 3.141*** 0.0008 − 3.366 0.000
Group 𝜌-statistic 0.815 0.792
Group PP-statistic − 3.376*** 0.000
Group ADF-statistic − 3.792*** 0.000
Kao (1999) Statistic Prob.
− 4.513*** 0.0000
Banerjee and Carrion-i Sil‑ 10% 5% 1%
vestre (2017) test
CIPS = − 1.677** − 1.5 − 1.61 − 1.8

**,***Mean that we reject the null hypothesis of non-cointegration at the 5% and 1% level

Table 5  Panel cointegration test: Statistic Value Z-value P value

Westerlund test
Gt − 1.883*** − 4.695 0.000
Ga − 4.294 − 0.583 0.280
Pt − 10.220*** − 6.401 0.000
Pa − 4.473*** − 6.410 0.000

***Mean that we reject the null hypothesis of non-cointegration at

the 1% level

based on the unit root test of the residuals from the long-run relationship between
ESG and GDP growth (the latter being estimated by Pesaran (2006) approach).3
When applying the Pedroni, the Kao and the Banerjee and Carrion-i-Silvestre
tests (Table 4), we find that:

• the Panel-PP and Panel ADF-statistic (within-dimension), Group PP-statistic and

Group ADF-statistic (between-dimension) are significant, suggesting that 4/7
tests reject the null hypothesis of no cointegration;
• the Kao (1999) test rejects the null hypothesis of no-cointegration at the 1%
level;
• the Banerjee and Carrion-i-Silvestre test rejects the null hypothesis of no-cointe‑
gration at the 5% level.

3
The residual 𝜇 = GDP − 𝛽ESG where 𝛽 = 0.554 is estimated by Common Correlated Effects Estima‑
tion (Pesaran 2006).

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Table 6  Hausman restriction DFE versus PMG MG versus PMG

test on coefficients
chi2(1) 9.58 2.33
Prob>chi2 0.0020 0.126

H0: difference in coefficients not systematic

Moreover looking at the results of the Westerlund tests (see Table 5), we observe
that the Gt, Pt and Pa are significant. This indicates that 3/4 of the Westerlund tests
reject the null hypothesis of no cointegration.
As a consequence, we conclude that there is a cointegration between GDPC and
ESGI.

4.3 Short and long terms estimates

Since we find evidence of a cointegration between GDP per capita and ESG perfor‑
mance, we proceed to estimate the (short term and long term) coefficient associated
with ESGI (GDPC being the dependent variable). We use the following three regres‑
sion methods: MG (Pesaran and Smith 1995), PMG (Pesaran et al. 1999) and DFE.
First, we notice that in the short run, the effects of the estimated cointegrating
vector (i.e., the Error correction term) are significant and negative as expected (see
the columns “PMG”, “MG”, and “DFE”).
Second, the long term ESG elasticity from the DFE regression method is about
1.05 and is significant at 1% level; while the same elasticities from the PMG and
MG regression methods are −0.202 and 1.225 respectively and are not significant.
Let us remind that, as explained in Sect. 3.2, the main difference between the three
regression methods concerns the assumption on the coefficients.
Short term coefficients of ESG performance provide even more interesting
insights. As indicated earlier, the short term coefficients are not restricted to be the
same across countries, so that we do not have a single pooled estimate for each coef‑
ficient. Nevertheless, we can still analyse the average short term effect by consider‑
ing the mean of the corresponding coefficients across countries. We find that the
short term average relationship between ESG performance and GDP per capita is
positive and significant (at the 5% level) only in the case of the PMG regression.
In order to conclude concerning the short and long terms effects of ESG perfor‑
mance on GDP per capita, we perform two Hausman restriction on coefficients tests
(see Table 6). The Hausman tests indicate that the DFE model is preferred.
Therefore, we conclude that there is a positive and significant relationship
between ESG performance and GDP per capita in the long run; whereas, no such
relationship exists in the short run.

4.4 Short term estimates for each country

Going a step further, we use the major advantage of PMG estimation methodology
over the standard DFE, which is the fact that it allows the short term coefficients

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Table 7  PMG short term 𝛥ESGI Constant

regression for each country
Iceland 5.474** (2.517) 15.36 (10.19)
South Korea 0.918** (0.407) 9.414* (5.553)
Ireland 1.248* (0.642) 9.403*** (2.932)
Australia 2.076 (2.187) 9.526 (6.629)
Austria 0.233 (0.168) 6.258*** (2.412)
Belgium − 0.100 (0.131) 5.583*** (2.045)
Canada − 2.426 (1.521) 14.85** (7.351)
Switzerland − 0.161 (1.059) 0.507 (4.669)
Germany 0.118 (0.224) 3.205 (2.906)
Denmark 0.0746 (0.327) 10.83** (4.120)
Spain 0.00294 (0.125) 6.889*** (2.354)
Finland − 0.169 (0.296) 9.862*** (3.659)
France 0.00439 (0.124) 7.323*** (2.554)
UK 0.209 (1.1077) 19.35** (8.354)
Greece 0.235 (0.219) 1.818 (2.758)
Italy − 0.230 (0.237) 8.110 (5.978)
Japan 0.491 (0.547) 20.77** (9.479)
Netherlands 0.166 (0.440) 8.918*** (3.039)
Norway 2.579 (1.760) 39.15*** (13.79)
New Zealand 0.176 (0.981) 8.665 (7.745)
Portugal 0.0359 (0.0613) 10.56** (5.146)
Sweden 0.400 (0.932) 17.68* (9.444)
Poland 0.270 (0.296) 4.501 (3.223)
Turkey 0.0254 (0.0572) − 0.849 (0.944)
United States 1.597 (2.811) 23.53** (8.538)
Czech Republic 0.230 (0.193) 2.636 (1.904)
Hungary − 0.0491 (0.749) 7.613 (6.214)
Luxembourg 0.571 (0.503) 14.27** (6.020)
Mexico − 0.00174 (0.430) 3.057 (3.057)

Standard errors in parentheses. ***, **,*Significant at the 1%, 5%

and 10% level

(including the adjustment coefficients) and error variances to differ freely across
countries, but maintains a common specification for the long term relationship (i.e.,
constrains the cointegrating vector to be the same across countries). Accordingly,
it is possible to exploit the cross-section dimension of the data set, while allowing
different short term dynamics (including the speed of adjustment) to temporarily
deviate from equilibrium. These features are relevant since the homogeneity of the
long run relation between economic growth and ESG performance across countries
is easily tested.
A detailed picture of the PMG country-specific estimations is reported in Table 7.
They indicate that while there is on average (of the 29 countries) no relationship in

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Table 8  Panel cointegration Variable PMG MG DFE

(dependent variable: GDP per
capita) Long run estimates
ESGI − 0.202 1.225 1.053***
(.154) (.8574) (.3029)
Short run estimates
𝛥ESGI .484** .169 .220
(.238) (.252) (.1774)
Error correction (ec) − .213*** − .308*** − .282***
(.0249) (.0371) ( .0497)
Constant 10.308*** − 35.430** − 11.833*
(1.520) ( 16.588) (6.699)

Standard errors in parentheses. ***, **, *Significant at the 1%, 5%

and 10% level

the short run between ESG performance and GDP per capita, this short term rela‑
tionship is positive and significant for Iceland and South Korea and, to some extent,
Ireland (significant at the 10% level of significance). The coefficient associated with
Iceland is however about six times higher than the coefficient associated with South
Korea (5.474 compared with 0.918 for South Korea). This means that ESG perfor‑
mance strongly drives (among some other criteria) the short-term dynamics of Ice‑
land GDP per capita. A reason could be that Iceland faced soil erosion, and econom‑
ically is highly dependent to fisheries, seafood and ecological tourism.

5 Robustness check

In this section, we provide some additional estimates in order to check for the
robustness of our results. We first check whether the positive effect of ESG on GDP
per capita remains true when we use the t − 1 and t − 2 values of ESG instead of
the t and t − 1 values of ESG as in Eq. 4. Indeed it may be the case that it is only
past values of ESG that influence countries’ current GDP per capita. In the second
robustness check, we distinguish between the three components of ESG in order to
check if the effect is the same when looking at environmental, social or governance
dimension. Finally, we conduct a robustness check in order to deal with the potential
endogeneity of the ESG variable.

5.1 DFE regression with lag of ESGI

As in the previous section, the DFE model, validated by the Hausman tests, is pre‑
ferred. The result in Table 8 is estimated from Eq. (3) that already includes a 1-year
lag. In order to check for the robustness of the long-run effect of ESGI performance
on economic growth, we estimate the following Eq. (5) with a 2-year lag in ESGI:

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Table 9  Dynamic fixed effect Variable DFE lag 1 DFE lag 2

regression with the lag of ESGI
Long run estimates
ESGI 1.053*** 0.85**
(0.3029) (0.34)
Short run estimates
𝛥ESGI 0.220 −0.07
(0.1774) (0.11)
Error correction (ec) − 0.282*** − 0.31***
( 0.0497) (0.08)
Constant − 11.833* − 8.50
(6.699) (8.84)

Standard errors in parentheses. ***, **, *Significant at the 1%, 5%

and 10% level

𝛥GDPCi,t = 𝜙i (GDPCi,t−1 − 𝛼0,i − 𝛼i ESGIi,t−1 ) − 𝛿1,i 𝛥ESGIi,t−1 + ui,t (5)

where 𝛥ESGIi,t−1 = ESGIi,t−1 − ESGIi,t−2
The results in Table 9 show that even if the long-run coefficient is weaker (0.85
compared to 1.053 from Table 8), it remains positive and significant. Therefore, the
positive effect of ESG on GDP per capita in the long run is confirmed.

5.2 Taking into account the interaction between dimensions

Our objective was to analyse the effect of ESG as a whole on economic growth.
The reason for taking ESG as a whole is that there is a correlation between the three
dimensions of ESG. Therefore, when we take only one dimension, we cannot be
sure that it includes information concerning this dimension alone. Therefore, as in
the literature on CSR (see Crifo et al. (2016)), if we want to analyse the effect of
each dimension, then we need to analyse the interactions between the three dimen‑
sions. Following Crifo et al. (2016), we construct three binary variables from the
quantitative values of each dimension, namely, Ei,t , Si,t and Gi,t which represent the
environmental dimension, the social dimension and the governance dimension,
respectively, for country i at time t. We construct a binary environmental variable

1, if Ei,t ≥ Ē t
{
EBi,t =
0, otherwise
1 ∑n
where Ē t = E
n i=1 i,t
Likewise, we obtain a binary social variable SBi,t and a binary governance vari‑
able GBi,t . These three variables divide the dataset into eight subsets for each period:
(EB = 0, SB = 0, GB = 0), (EB = 1, SB = 0, GB = 0), (EB = 0, SB = 1, GB = 0),
(EB = 0, SB = 0, GB = 1), (EB = 1, SB = 1, GB = 0), (EB = 1, SB = 0, GB = 1),
(EB = 0, SB = 1, GB = 1), (EB = 1, SB = 1, GB = 1). For instance, the group
(EB = 0, SB = 0, GB = 0) includes countries who perform poorly in all three

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Table 10  Regression taking into account the interaction between the three dimensions of ESG
Variable EBxSBxGB EBxSB EBxGB SBxGB EB SB GB Constant

7.49*** − 3.77* − 6.95*** 1.44 2.12** 0.58 0.94 29.13***

(2.72) (2.10) (2.00) (1.53) (1.05) (1.22) (1.24) (0.94)
Observations 551
R-squared 0.93

Standard errors in parentheses. ***, **, *Significant at the 1%, 5% and 10% level

dimensions. We then estimate a two-component FE panel model, with EB, SB, GB,
EB × SB, EB × GB, SB × GB, EB × SB × GB as explanatory variables:
GDPCi,t =𝛼 + 𝛽1 ∗ EBi,t + 𝛽2 ∗ SBi,t + 𝛽3 ∗ GBi,t + 𝛽4 ∗ EBi,t × SBi,t
+ 𝛽5 ∗ EBi,t × GBi,t + 𝛽6 ∗ SBi,t × GBi,t + 𝛽7 ∗ EBi,t × SBi,t × GBi,t + 𝜖i,t
(6)
The coefficients are interpreted as follows:

• The intercept (𝛼 ) of the model concerns countries from the group

(EB = 0, SB = 0, GB = 0).
• The intercept plus the second coefficient (𝛼 + 𝛽1) concerns countries from the
group (EB = 1, SB = 0, GB = 0).
• The intercept plus the third coefficient (𝛼 + 𝛽2) concerns countries from the
group (EB = 0, SB = 1, GB = 0).
• The intercept plus the fourth coefficient (𝛼 + 𝛽3) concerns countries from the
group (EB = 0, SB = 0, GB = 1).
• The intercept plus the second plus the third plus the fifth coefficients
(𝛼 + 𝛽1 + 𝛽2 + 𝛽4) concerns countries from the group (EB = 1, SB = 1, GB = 0).
• The intercept plus the fourth plus the sixth coefficients (𝛼 + 𝛽1 + 𝛽3 + 𝛽5) con‑
cerns countries from the group (EB = 1, SB = 0, GB = 1).
• The intercept plus the third plus the fourth plus the seventh coefficients
(𝛼 + 𝛽2 + 𝛽3 + 𝛽6) concerns countries from the group (EB = 0, SB = 1, GB = 1).
• The sum of all coefficient concerns countries from the group
(EB = 1, SB = 1, GB = 1).

The result of the estimates is provided in Table 10. It states that in terms of GDP per
capita:

• There is no significant difference between, on the one hand, countries that per‑
form poorly in the three dimensions, and on the other, countries that are good
only in the governance dimension, countries that are good only in the social
dimension, and countries that are good in both the governance and social dimen‑
sions (but not in the environmental dimension);
• Countries that are good in the environmental dimension alone perform better
(2.12) than countries that are bad in all dimensions;

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• Countries that are good in the environmental and governance dimensions per‑
form less well (−6.95 + 2.12) than countries that are bad in all dimensions;
• Countries that are good in the environmental and social dimensions perform bet‑
ter (2.12) than countries that are bad in all dimensions;
• Countries that are good in the environmental and governance dimensions per‑
form better (7.49 −6.95 + 2.12) than countries that are bad in all dimensions. We
note that we consider coefficients that are significant at 10% to be non-signifi‑
cant.

5.3 Endogeneity concern

In order to take into account the potential endogeneity of our ESG variable, we use
the instrumental variables (IV) approach proposed by Wooldridge (2005) to investi‑
gate this issue.4
We follow Crifo et al. (2017) by using the number of ISO 14001 certificate as an
instrument variable. We use as second instrumental variable either the incarceration
rate (prisoners per 100,000 population)5 as in Crifo et al. (2017), or the country-
year mean of ESG as in Cheng et al. (2014); Pekovic and Vogt (2020). This latter
instrumental variable is created as follows: firstly, the set of countries is split into
three geography-based groups6; secondly, for each country, the country-year mean
of ESG variable is computed as the ESG performance of other countries in the same
group over time.
The results (see Table 11) from the first-step of the IV regression show that the
coefficients associated with the instruments are significant. In addition, the Ander‑
son LM statistic for testing under-identification and the Cragg–Donald statistic for
testing weak identification are well above the critical values, suggesting that our
instrumental variables are relevant. Finally, from our two IV regressions, we can see
that the coefficient associated with the fitted ESGI (derived from the first-step) is
still positive and significant at the 1% level.

4
See Baum et al. (2007) for practical details.
5
The database of ISO 14001 is from www.​iso.​org, and incarceration rates are from UNDP, World Bank
and www.​priso​nstud​ies.​org.
6
Northern European Countries Group: Norway, Iceland, Sweden, Austria, Finland, Denmark, UK and
Ireland; South and Center European Countries Group: Greece, Spain, Italy, France, Belgium, Portugal,
Germany, Czech Republic, Poland, Netherlands, Switzerland, Luxembourg and Hungary; Outside Euro-
pean Countries Group: New Zealand, USA, Japan, Canada, South Korea, Mexico, Turkey and Australia.

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Table 11  Two-stage least square estimations

First step Second step First step Second step

Variable ESGI GDPC ESGI GDPC

ISO 14001 − 0.00021*** − 0.0001*
(0.00007) (0.00007)
Incarceration rate − 0.036***
(0.0049)
Country year mean of ESG 0.695***
(0.067)
Fitted ESG 1.165*** 1.221***
(0.152) (0.116)
Constant 74.947*** − 50.94*** 21.730*** − 54.83***
(0.759) (10.68) − 4.774 (8.123)
Weak identification test (Cragg– 29.82*** 56.32***
Donal Wald F statistic)
Underidentification test (Ander‑ 54.09*** 93.95***
son canon. Corr. LM statistic)
Observations 551 551 551 551
R-squared 0.511 0.509

Standard errors in parentheses. ***, **,*Significant at the 1%, 5% and 10% level

6 Discussion and conclusion

Using a dataset on 29 OECD countries over the period 1996–2014, we provide

evidence that, on average, ESG performance does not have a significant impact on
GDP per capita in the short run. In the long run however, countries’ ESG perfor‑
mance has, on average, a positive and significant impact on GDP per capita. Our
paper is, to the best of our knowledge, one of the first to fully analyse the effect of
ESG performance on economic growth with a distinction between short and long
terms. It is therefore difficult to directly compare our results to existing results,
since the latter use only one component of ESG performance (for instance, ine‑
quality as in Halter et al. (2014) or corruption as in Akai et al. (2005) and Lui
(1996) or environmental quality-energy consumption as in Sebri (2015)). In this
paper, we use an ESG index that includes all dimensions of ESG. The reason is
that, like in CSR analysis (Crifo et al. 2016), it is the combination of the ESG
dimensions that reinforces ESG performance. Nevertheless, our results are par‑
tially in line with the existing results. Sebri (2015), for instance, using a meta-
analysis approach conducted on 40 empirical studies, observes that the prob‑
ability of obtaining a neutral hypothesis (i.e. the absence of causality between
environmental quality, energy consumption and economic growth) is greater in
the short run than in the long run. Similarly, Akai et al. (2005), by exploring the
nexus between corruption and economic growth, show a negative and statistically
significant impact of corruption on economic growth in the medium term and in
the long term, but an insignificant impact in the short term.

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Our paper suggests that ESG factors are important in explaining long-term eco‑
nomic growth, that is, the better the ESG performance of a country, the better its
long-term economic growth prospects. Thus, in the long run, sound ESG policies
may bring about strong and sustainable economic growth in a country. It is worth
noting that by providing analysis on the impact of ESG performance on GDP per
capita, we offer a meaningful insight into the relationship between non-economic
factors and economic growth, with an important distinction between long-term and
short-term changes.
We show also that although, on average, the economic benefits (in terms of eco‑
nomic growth) of a good ESG performance accrue only in the long run, in line with
our Hypothesis 1, two countries, Iceland and South Korea, gain an economic benefit
in the short term from their ESG performance (in contradiction to our Hypothesis
2 which predicts either no economic benefit or a negative one). Our econometric
regressions and tests seem to suggest that our results are robust.
Our results have some practical implications.
First, they indicate that environmental, social and governance factors are deci‑
sive for long-term economic growth. Such a conclusion is especially interesting
for developing countries. It shows that economic growth is also a matter of values.
Fighting for gender equality, combatting corruption, advocating for a sustainable use
of natural resources, implementing the rule of law, supporting education are tanta‑
mount to fighting for sustainable economic growth. This conclusion is also inter‑
esting for developed countries since implementation of economic policies based on
ESG criteria may help to improve economic growth rates that have remained low
over the last decade. These policies are essential to establish accurate pricing that
reflects the true value of natural resources, the costs of corruption, and provides
incentives to change behavior, strengthen social stability and encourage innovation.
Second, our results highlight the key role of the environmental dimension for
long-term economic growth prospects. In particular, the judicious management of
natural resources is seen as a critical component for economic activity and growth,
as it provides the means of producing goods and services, and minimizes the output
of unwanted by-products such as pollution and waste. For instance, climate changes,
e.g. extreme weather such as drought and heavy rainfall pose substantial risks for
investment, constraining economic development. These effects are of interest to pol‑
icymakers when choosing to take action to improve environmental performance by
selecting the relevant policy instruments.
Third, despite the major role that developed countries can play in disseminating
ESG policies, what is particularly needed is a collective effort within an open and
inclusive framework, based on the active involvement of all players, i.e., emerging
economies, developed and developing countries, and international organizations.
In this process, the OECD can serve as an important, common platform to benefit
exchanges and to help find global, coherent, beneficial and cross-cutting solutions.

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However, our paper includes at least three limits that can serve as avenues
for future research. First, we do not investigate in our paper, the mechanisms by
which countries’ ESG performance is transmitted to economic performance. It
could be interesting to examine these mechanisms using as moderating instru‑
ments, variables like countries’ fiscal space, debt to GDP ratio, deficit to tax ratio,
etc. Second, future research should exploit the heterogeneities, such as geographi‑
cal and cultural differences, that exist between countries in our database and apply
spatial panel data estimation. This estimation technique, commonly used in the
regional science and the spatial econometrics literature, could be applied in our
context to further explore the role of the ESG factors on the economic growth.
Finally, it would be worthwhile to include more countries, especially developing
countries, in the analysis as well as to estimate the model over a much longer time
span. But we need in such a case, to consider the potential existence of structural
breaks that may happen when the period analysed is longer.

Appendix

Table 12 provides average GDP per capita and ESG index of each country over
the 19 year period. In some sense, this table deals with cross-sectional aspects of
the dataset.
One can remark in Fig. 1 that the fitted values seem to suggest a positive cor‑
relation, in cross section, between countries’ ESG performance and their GDP
per capita: on average, countries with high ESG indices have high GDP per
capita. However there exist some disparities between these 29 OECD countries.
For instance, countries like Norway or Iceland have (on average on the period
1996–2014) both high GDP per capita and high ESG index; countries like Mex‑
ico, Turkey and Greece have both low GDP per capita and low ESG index; while
a country like New Zealand has a (relatively) low GDP per capita and a high ESG
index.
On the other hand, Table 13 provides average GDP per capita and ESG index
of each time period, for all countries. From this standpoint, Table 13 deals with
time series aspects of the dataset.
One can remark in Fig. 2 that even if the fitted values also seem to suggest a
positive correlation, between ESG performance and GDP per capita, this link is
less regular in time series.

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Table 12  The average GDP per Country GDPC_country ESGI_country

capita and average ESG index
for each country over the period Norway 63,769 87.447
1996–2014
Iceland 47,903 85.310
New Zealand 23,797 81.834
Sweden 38,048 81.347
Austria 33,312 79.114
Canada 31,926 79.058
Finland 32,616 78.818
Switzerland 49,841 77.836
Denmark 43,016 77.631
Luxembourg 73724 74.338
Netherlands 35,943 74.256
Australia 37,931 71.613
United Kingdom 33,458 71.086
Portugal 16,235 70.960
Ireland 34,908 70.876
Germany 30,438 70.729
France 29,812 70.179
Belgium 31,727 69.841
United States 36,859 69.003
Spain 22,169 67.478
Japan 29,883 66.537
Hungary 11,989 62.987
Czech Republic 11,495 61.575
Italy 26,934 61.383
Poland 7814 58.505
Greece 18,939 57.897
South Korea 16,097 57.138
Mexico 9006 47.684
Turkey 7947 47.524

GDPC-country = Country average GDP per capita over the period

1996–2014; ESGI-country = Country average ESG index over the
period 1996–2014

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Fig. 1  Graph based on Table 12 with x-axis and y-axis defined respectively by average ESG Index and
average GDP per capita (× 1000) for each country over the period 1996–2014

Table 13  Average GDP per Time GDPC_time ESGI_time

capita and average ESG index of
all countries for each year 1996 24,667 68.744
1997 26,082 68.859
1998 27,083 69.036
1999 28,614 69.164
2000 30,331 69.672
2001 30,819 69.502
2002 30,688 69.607
2003 30,012 69.688
2004 30,819 69.717
2005 32,248 69.769
2006 32,281 69.834
2007 33,627 70.068
2008 31,991 70.217
2009 29,569 70.371
2010 32,083 70.627
2011 32,349 70.846
2012 33,180 71.023
2013 32,364 71.569
2014 32,682 71.677

GDPC-time = Average GDP per capita for all countries. ESGI-time

= Average ESG index for all countries

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Fig. 2  Graph based on Table 13 with x-axis and y-axis, defined repectively by average ESG Index and
average GDP per capita (× 1000) for all countries for each year

Supplementary Information The online version contains supplementary material available at https://​doi.​
org/​10.​1007/​s10663-​021-​09508-7.

Declarations

Conflict of interest The authors declare that they have no conflict of interest.

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