The predictive role of country-level ESG indicators

Abstract

Environmental, social and governance aspects, collectively known as ESG factors, have gained significant importance in finance recently. This paper focuses on uncovering the importance of the predictive power of country-level ESG indicators in estimating risk premiums. We use the Worldwide Governance Indicators and the database of global ESG indicators provided by the World Bank, while we apply the neural networks methodology. A constant relationship between ESG factors and risk premiums would result in obvious implications for policymakers, as well as for investors. We seek empirical evidence to leverage ESG considerations in investment decisions and policymaking to ensure sustainable economic development.