How Do Environmental, Social, and Governance (ESG) Factors Impact on Public Finance Performance? Risk, Efficiency, and Public Financial System Perspectives

Environmental, social, and governance (ESG) risk is becoming increasingly important in conditions of ongoing environmental and social change. This has specific implications for risk management in the public sector. Many publications have been devoted to ESG risk in the commercial sector, especially for enterprises, while there is a literature gap in ESG risk analysis in the public sector. The aim of the paper is to identify ESG factors impacting on public finance based on the ESG criteria incorporated in the public decision-making process, and diagnose relationships between public finance, ESG, risk, and efficiency. The article uses fuzzy cognitive map to diagnose ESG factors and their link to public finance. A two-stage research procedure was used to achieve the research goal. In the first stage, the identification of ESG factors that are the most important from the view of public finance was carried out. In the next step, ESG factors that were incorporated by public institutions in the decision-making process were identified, and the interdependencies between nonfinancial factors and risk, efficiency, and public financial system were analyzed. Six independent experts were asked to evaluate a total of 62 factors determined based on a review of the literature. The strongest impact of environmental factors on risk in public finance was found comparing the social and governance one. In the scope of the environment, it can be seen that the most important is the carbon intensity emissions variable, which is clearly linked to other variables from this area. The results are important from the point of view of recommendations for government policy on environmental protection, especially in the context of actions aimed at reducing greenhouse gas emissions and combating climate change.