The Propagation of ESG Practices Through Multinational Corporations

Abstract

We identify a positive spillover effect of Environmental, Social, and Governance (ESG) regulations through global networks of multinational firms. Our tests exploit staggered mandatory changes in Environmental, Social, and Governance regulations around the world. We find that impacted firms, those with foreign subsidiaries exposed to stricter regulations, significantly increase R&D investments, green inventions in their domestic operations, and have higher environmental ratings. Cities with more impacted firms experience a greater reduction in air pollutant emissions. Additional tests suggest that firms’ improvements in domestic ESG practices result from their motives to access foreign capital markets. Our findings have important policy implications.

Keywords: Green Innovation, Subsidiary Networks, Multinationals, ESG Regulation, Spillover