Impact of ESG on FDI in SAARC Nations: Dissertation Study

LINK BETWEEN ESG AND FDI: EVIDENCE FROM SAARC NATIONS

NAME: Gauri Gupta<br>Roll.no: 22/22009<br>Course: B.A.(Hons) Economics 4th year

What we mean by ESG in particular?

ESG, or Environmental, Social, and Governance, is a framework investors and stakeholders use to assess a company's non-financial performance, risk management, and long-term sustainability, covering its impact on the planet (E), people (S), and internal structure (G).<br><br><b>Key parameters include:</b><br>• <b>Environmental:</b> emissions, waste, energy<br>• <b>Social:</b> labor, human rights, community<br>• <b>Governance:</b> board structure, executive pay, ethics

Problem Statement

<b>Conflicting Hypotheses:</b> Does FDI seek 'Pollution Havens' (weak regulations) or 'Pollution Halos' (superior sustainability standards)?

<b>Developing Nation Dilemma:</b> SAARC nations need capital for growth but risk environmental degradation if they lower standards to attract investment.

<b>Lack of Regional Clarity:</b> While global studies exist, the specific directionality (Causality) between ESG scores and FDI inflows within the specific context of SAARC remains under-researched.

<b>Urgency:</b> With $121 trillion in assets committed to PRI (2021), SAARC nations must align with ESG to access future capital.

Literature Review & The Research Gap

<b>State of Art:</b><br>• Dunning (1993): Traditional determinants (Market size, Infrastructure) are paramount.<br>• Chipalkatti et al. (2021): Good governance increases FDI; social factors can be mixed due to labor costs.<br>• Van & Whelan (2021): 58% of studies show a positive link between ESG and performance (see chart).<br><br><b>Identified Gap:</b><br>Limited empirical work focuses on the <b>directionality</b> in SAARC. Does FDI bring better ESG standards (Spillover), or do high ESG standards attract FDI?

Research Objectives

<b>1. Estimate Magnitude:</b> To analyze the nature and magnitude of the impact of Environmental, Social, and Governance parameters on FDI inflows across SAARC nations (2014-2024).

<b>2. Determine Causality:</b> To investigate the bidirectional relationship (Granger Causality) between FDI and ESG—checking if FDI manifests into ESG spillovers.

<b>3. Policy Framework:</b> To provide empirical evidence for policymakers in developing nations on whether stricter ESG regulations act as a deterrent or a magnet for high-quality foreign capital.

Work Progress & Commencement

• <b>Commencement:</b> January 2025.<br>• <b>Status (Dec 2025):</b> Project Completed.<br>• <b>Milestones Achieved:</b><br> - Comprehensive Literature Review (Q1)<br> - Data Collection from World Bank & ESG Indices (Q2)<br> - Panel Data Regression & Causality Tests (Q3)<br> - Thesis Drafting and Defense Prep (Q4)

Methodology

<b>Research Design:</b> Quantitative Approach using Panel Data Analysis.<br><br><b>Key Models:</b><br>1. <b>Panel ARDL / Fixed Effects:</b> To control for country-specific heterogeneity and analyze short-run vs. long-run impacts.<br>2. <b>Granger Causality Test:</b> To determine the direction of the relationship (i.e., does FDI cause ESG improvement, or vice versa?).<br><br><b>Variables:</b><br>• Dependent: FDI Inflows (% of GDP).<br>• Independent: E, S, G Scores, CO2 emissions per capita, Trade Openness, Infrastructure Index.

Data Sources

<b>Time Period:</b> 2014 - 2024 (10-year extensive panel data).

<b>FDI & Economic Data:</b> World Bank Development Indicators (WDI) - GDP, FDI inflows, Trade Openness.

<b>ESG Data:</b> Combines data from Environmental Performance Index (EPI), UN Sustainable Development Goals (SDG) database, and country-specific disclosure reports (e.g., BRSR in India).

<b>Sample:</b> SAARC Member Nations (Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, Sri Lanka).

Preliminary Discussion & Implications

<b>Dual Effect Verified:</b> Consistent with the Environmental Kuznets Curve (EKC), initial FDI may spike emissions (Scale Effect), but long-term investment brings cleaner technology (Technique Effect).<br><br><b>Governance is Key:</b> Strong institutional quality and ease of doing business are consistently positive predictors of FDI in SAARC, often outweighing pure cost advantages.<br><br><b>Social Pillar Lag:</b> While human capital is critical, the link between social parameters (e.g., labor rights) and FDI remains weaker in the short run due to labor cost considerations, suggesting a need for policy intervention.

Sustainable Development is not a barrier to investment, but a prerequisite for future resilience. SAARC nations must integrate ESG into their FDI policies to transition from 'Pollution Havens' to 'Green Growth Hubs'.

Conclusion & Final Thoughts