Role of ESG (Environmental, Social and Governance) in promoting sustainable export competitiveness : evidence from Asian exporters to the European Union

Abstract

Nowadays, the principles of Environmental, Social and Governance (ESG) are an integral part of the competitiveness of Asian exporters and part of the EU market access regime. The principles of ESG have become a component of the rules of access to the EU markets from a voluntary, business practice to a component of competitiveness of the exporters from Asia. Even though theory has caught on in this connection, the empirical research at the country level is geographically limited, is based on limited methodology, and lacks consideration of the different impacts that the individual ESG dimensions have. The aim of this study is to explore the gaps by investigating the impact of disaggregated ESG indicators (including environmental quality, social development and institutional governance) on bilateral export performance in the 32 Asian economies and the European Union from 2002 to 2023 (N=704 observations). The study follows the ideas of New Trade Theory and Regulatory Trade Theory and uses models of log bilateral exports as a function of six proxies for these regressors, namely CO2 emissions (co2), share of renewables (re), government effectiveness (gef), regulatory quality (rq), Human Development Index (hdi), and expenditure on education (ex_exp), plus macroeconomic controls and event dummies for the Global Financial Crisis (fcrisis) in 2008 and COVID-19. The following nine-step estimation procedure is followed: Panel unit root and cointegration testing, Hausman specification testing, residual diagnostics and the Driscoll-Kraay standard error correction. Ordered system GMM robustness checks validate a Fixed Effects model that is robust to heteroskedasticity, serial autocorrelation and cross-sectional dependence. The findings suggest an order of effect of the ESG. The social dimension (as a proxy HDI) is the most important factor influencing the competitiveness of EU exports (B = +4.681, p < 0.001) and so is educational expenditure (B = +0.008, p = 0.012). The government effectiveness variable has a positive influence (B = +0.004 and p = 0.031), which is in line with the institutional trade facilitation theory. The negative coefficients of the environmental variables suggest that the net transitional adjustment costs of these variables during the study window are negative, carbon intensity has a marginal negative impact (p = 0.081) and renewable energy share has a significant negative impact (p < 0.01). While the COVID-19 crisis has had no average effect on Asian - EU bilateral exports its effects have been heterogenous across Asian countries, and the Global Financial Crisis (GFC) resulted in a decline in the flows of approximately 8%. The results are applicable to the policy agendas of Asian trade policy, EU sustainability governance and development finance strategy.