The propagation of ESG practices through multinational corporations

Multinational firms are increasingly required to comply with evolving environmental, social, and governance (ESG) regulations in their host countries, raising the question of whether such regulations shape corporate behavior in firms' home countries. Using data on Chinese multinational firms from 2015 to 2020 and hand-collected information on cross-country changes in mandatory ESG regulations, this study examines cross-border spillovers of ESG regulation propagated through multinational networks. The results indicate that firms with subsidiaries in countries that adopt more stringent ESG regulations subsequently increase domestic R&D expenditure, generate more green innovation, and receive higher ESG ratings. These effects are more pronounced when exposure is concentrated in financially developed host countries and among firms subject to greater institutional investor monitoring, consistent with financial-market discipline as the underlying mechanism. Further evidence indicates local spillovers in ESG-related outcomes: cities with greater exposure to multinationals affected by foreign ESG regulation experience larger declines in air pollution. Overall, the findings suggest that ESG regulations can propagate across borders via multinational networks, with important implications for emerging markets seeking to strengthen ESG practices.