Impact of market regulations on firm-specific esg performance: evidence from asian economies

This paper examines the effects of the business, credit, and labour market regulations on firms' Environmental, Social, and Governance (ESG) performance in Asian countries. Analysing annual data of 1187 firms across 12 Asian economies from 2005 to 2021, the paper finds that reduced regulatory constraints, which allow greater access and availability to credit, flexibility in labour, and product markets, enhance ESG performance in environmental and social areas while governance practices remain largely unaffected. Government depository institution ownership shows a multi-faceted impact, indicating potential agency conflict, with positive effects on workforce practices but adverse effects on shareholder and management activities. The influence of reduced regulation varies by income level: Firms in developed countries benefit from improved credit and business regulations, whereas growing firms in developing Asian countries see ESG improvements through enhanced labour regulations. The study finds that large, financially strong firms with sustainability-linked executive compensation achieve higher ESG scores. Access to capital plays a vital role in ESG improvement. Additionally, firms can prioritise profit maximisation over ESG improvement following potential opportunities. These findings provide valuable insights for policymakers in designing regulatory pathways that support ESG practices aligned with a country's economic context.