Do Sovereign-Environmental, Social and Governance (S-ESG) Commitments Promote Financial Inclusion?

Given the need to respect humanity, the environment, and society, and the progressive development of social responsibility, environmental, social and governance (ESG) commitments and the need for ethical and sustainable finance, this paper aims to examine the impact of sovereign ESG on financial inclusion (FI). The focus is on Middle East and North Africa (MENA) and Sub-Saharan Africa (SSA) countries over the period 2010-2020. First, we construct separate sovereign ESG indices using the Shannon entropy method; second, we investigate the impact of ESG indices on FI using the random and fixed effects methods. The findings show that social and governance commitments lead to better FI, whereas the environmental pillar harms FI. Our results show that integrating social and institutional governance dimensions into business models and government policies improves access to bank accounts, loans, and savings for disadvantaged people. These results are robust across multiple proxies and estimation methods. The findings can assist policymakers in designing effective policies that motivate countries to consider ESG commitments as a powerful tool to improve FI. To the best of knowledge, research on this topic within a broader Sovereign ESG framework and with a focus on FI is sparse. We fill this gap by empirically demonstrating how sovereign ESG policies, at the macro level, can promote financial inclusion.