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Environmental, Social and Governance (ESG) Performance in the Context of

Multinational Business Research

Article in Multinational Business Review · February 2022

DOI: 10.1108/MBR-11-2021-0148

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Environmental, Social and Governance (ESG) Performance in the Context
of Multinational Business Research

MARTINA LINNENLUECKE
Center for Corporate Sustainability and Environmental Finance
Macquarie Business School
Macquarie University, Sydney, NSW, Australia.
[email protected]

Accepted for publication in Multinational Business Review.

Cite as: Linnenluecke (2022) Environmental, Social and Governance (ESG) Performance in
the Context of Multinational Business Research. Multinational Business Review, Accepted
for publication, doi: 10.1108/MBR-11-2021-0148

1
Environmental, Social and Governance (ESG) Performance in the Context
of Multinational Business Research

Abstract

Purpose
This article examines the state of research on environmental, social and governance (ESG)
performance in the context of multinational business research. This article discusses research
progress as well as various issues and complexities associated with using ESG ratings in cross-
country studies and for assessing the performance of multinational enterprises (MNE) and
emerging market multinationals (EMNEs).
Approach
The article identifies emerging literature that focuses on tracking the development and uptake
of ESG ratings in the international context. It discusses three emerging research streams:
Research examining the ESG-financial performance relationship in emerging markets, research
tracking the ESG performance of multinationals in the various countries and regions they are
operating, and frameworks for assessing ESG-related risks on a country level.
Findings
While the emerging body of work adds an important dimension to the identification and
awareness of ESG issues globally, numerous unresolved issues become evident. ESG
frameworks have been built to assess corporate sustainability as it relates to firms in their
‘home’ countries (typically with a focus on developed countries), with limited applicability and
transferability to emerging markets. International firm activities are often not captured in detail
and not comprehensively mapped across firm subsidiaries and a firm’s corporate supply chain
where ESG issues are prone to happen, and ESG scores do not comprehensively integrate views
and voices from various local stakeholders that are impacted by firm activities, particularly
Indigenous communities.
Research implications
Research on ESG ratings in the context of multinational business research is generally sparse
and fragmented, thus creating opportunities for future research to expand on existing and
emerging findings.
Practical implications
The article creates awareness of issues to consider when using ESG ratings in cross-country
studies and for assessing the ESG performance of MNEs and EMNEs: ESG scores can be
subject to bias and are not weighted by materiality, which can be misleading for portfolio
construction and performance measurement purposes. Managers need to be aware that ESG
scores are often not capturing ESG issues occurring in supply chains and ESG issues affecting
local communities.
Originality/value
This study enriches the understanding of ESG in the context of multinational business research
practice.

Keywords: Environmental, social and governance (ESG), performance, multinational

enterprise (MNE)

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Introduction
A substantial body of literature has developed to monitor firms’ environmental, social and
governance (ESG) performance. ESG ratings typically form the basis for socially responsible
investment (SRI) strategies, a (loosely defined) umbrella term for investment practices that
target firms with ‘positive’ social and environmental profiles (Renneboog et al., 2008). The
rapid uptake of SRI investments has been seen as a sign that investors are not solely concerned
about the financial performance of their investment portfolio but also about the social and/or
environmental attributes of their investment choices (Bollen, 2007). Possible reasons might
include the alignment of investments with personal values and societal expectations (Bollen,
2007), and the desire to avoid possible exposure to higher risk (van Duuren et al., 2016). The
rapidly growing area of SRI sparked a substantial scholarly debate regarding whether higher
ESG-related performance can generate value for stakeholders – and whether instrumental
stakeholder theory (which views stakeholder satisfaction as instrumental for firm financial
performance) is a valid theory in the ESG context (e.g., Orlitzky et al., 2003). While recent
meta-analyses in the field point to generally positive associations between some aspects of ESG
and financial performance (Whelan et al., 2020), this finding is not universal across studies and
has not been consistently replicated in developing country contexts. Discrepancies among
studies have been attributed to the use of different ESG definitions and metrics (Eccles &
Stroehle, 2018; Whelan et al., 2020). However, discrepancies might also result from testing the
ESG-financial performance (ESG-FP) relationship in different markets and regions that are
characterized by different institutional regimes and ESG disclosure requirements but also by
differences in culture, human capital as well as social and governance structure, which are often
not fully captured by existing theory (Ortas et al., 2019).
Given the popularity of ESG investing in developed countries with mature markets, ESG has
been described as a “rich world phenomenon” (Chung, 2021). Indeed, companies in emerging
markets have not been the top choice for ESG-focused investors, for several reasons.
Investments in emerging markets are often seen as riskier investments due to weaker formal
institutions, less stringent regulatory environments, lower protection of shareholder rights,
lower levels of transparency, and more widespread corruption (Bahadori et al., 2021; Hoang,
2018). Firms operating in emerging markets also face challenges due to volatile governmental
policy, thus creating challenges that affect the E, S and G dimensions (Bahadori et al., 2021).
In addition, emerging markets present additional challenges due to limited information access
and an opaque information environment, meaning that reliable information on corporate ESG
performance is often not readily available and easily accessible (Mobius & Ali, 2021).
Nonetheless, there is now also growing recognition that typically understudied economies in
Asia, Africa, Eastern Europe, the Middle East, and Latin America have a substantial impact on
global sustainability (Ortas et al., 2019). Opportunities to tap into emerging market niches and
contribute to addressing growing concerns about environmental and social issues globally are
increasingly prompting investors (and researchers alike) to explore SRI investments in less
mature markets, accepting potentially higher risks for higher return prospects. However, the
empirical evidence on the ESG-FP relationship (also for emerging markets) is largely based on
evidence and frameworks developed for the U.S. and European/UK markets, which leads to

3
questions about whether it is viable (and appropriate) to ‘export’ ESG frameworks to assess
ESG performance outside of Western markets.1
Initially, literature started to trace the development and uptake of ESG in the international
context, focusing on ESG disclosure practices by firms in developed versus developing markets
(e.g., Chapple & Moon, 2005; Fekrat et al. 1996; Gamble et al. 1996; Maignan & Ralston,
2002). Studies primarily relied on theorizing the uptake of ESG as a strategic response
(achievement of legitimacy, compliance, and/or competitive advantages) in response to
increasing institutional pressures in different countries or markets, explained by different stages
of development (e.g., Chapple & Moon, 2005). The increased availability of ESG data by ESG
rating providers has allowed researchers to also empirically measure ESG performance in
cross-country studies (e.g., Ioannou and Serafeim, 2012). Building on these foundations, a first
body of emerging work studies ESG-FP relationships for firms in emerging market settings
(e.g., Duque-Grisales & Aguilera-Caracuel, 2021). Other emerging work in the field tracks the
ESG performance of multinational enterprises (MNEs) in the various countries and regions in
which they operate (Salsbery, 2021), primarily based on concerns about MNEs engaging in
corporate social irresponsibility (CSI) in jurisdictions with less stringent formal and social
institutional pressures (Brammer et al., 2021). There have been additional attempts to develop
frameworks for assessing ESG-related risks on a country level to assess ESG risks related to
governments or government-related issuers beyond individual companies (Pollard et al., 2018).
This article surveys the emerging body of work but also points to numerous unresolved issues.
Specifically, the article is structured as follows: First, the background section provides an
overview of research on ESG ratings in multinational business research. The following sections
then offer an overview of emerging research areas and current research progress, but also offer
a critical discussion of current approaches, issues, and complexities. These include: (1) ESG
frameworks have been built to assess corporate sustainability as it relates to firms in their
‘home’ countries (typically with a focus on developed countries), but might have limited
applicability and transferability study ESG in emerging markets; (2) ESG scores do factor in
international firm activities (e.g., Human Rights and Child Labour Policies) but these are often
not captured in detail and not comprehensively mapped across firm subsidiaries and a firm’s
corporate supply chain (where ESG issues are prone to happen), and (3) ESG scores do not
integrate views and voices from various local stakeholders that are impacted by firm activities,
especially Indigenous communities (see Pelosi and Adamson, 2016). Examining these issues,
the article then highlights areas in which future research is needed and concludes by offering a
discussion and points for future research.

Background: ESG ratings in the international context

From the 1990s onwards, researchers started to examine the disclosure of non-financial
information in corporate reports or on corporate websites in international settings (e.g., Chapple
& Moon, 2005; Fekrat et al. 1996; Gamble et al. 1996; Maignan & Ralston, 2002). Research
in this field was typically based on institutional and/or legitimacy theories to explain how

1
Ratings providers do typically provide some adjustments for companies operating in different geographical and cultural contexts, and provide
adjustments (e.g., relative to industry peers). However, ESG frameworks and rating schemes have largely been created based on Western
standards. Eccles and Stroehle (2018) provide a more in-depth discussion of how the background and origins of ESG ratings providers have
likely shaped their priorities in measuring ESG.

4
differences in institutional or regulatory conditions or social acceptance lead to international
variations in disclosure practices (see Baldini et al., 2018 as well as Ortas et al., 2019 for further
detailed reviews of these theoretical perspectives used to explain variation in ESG disclosure).
As ESG ratings by rating agencies and data vendors became more sophisticated and
commonplace, researchers began to use these datasets for the analysis of what was referred to
as corporate social performance (CSP) or ESG performance. A study that is frequently cited is
the analysis by Ioannou and Serafeim (2012) who obtained ESG data from Thomson Reuters
ASSET4 (now Refinitiv), alongside stock market data and national-level variables, for a
sample of 12,764 firm-year observations from 42 countries over seven years to analyse why
firms embedded in various national-level institutions exhibit significantly different corporate
social performances, concluding that variations in non-financial disclosures across countries
can be attributed to institutional, political and cultural factors.
Subsequent studies used various institutional and neo-institutional lenses to address
international variations in ESG disclosure. However; literature focusing on a truly international
perspective of ESG activity and ESG performance is still limited – not just due to a lack of
theory offering insights beyond Western paradigms, but also because of the limited availability
of ESG data for firms outside of North America or Europe and resulting analytical challenges
(Arun et al., 2021; Orsato et al., 2015; Rajesh & Rajendra, 2020). For example, even though
the study by Ioannou and Serafeim (2012) included data from 42 countries, the sample was
heavily focused on firms from the U.S., Japan, and the UK with most observations. Countries
such as Chile, Indonesia, Thailand, and the Philippines were represented with 5 or fewer
observations in the sample. The availability of ESG data has certainly improved considerably
since: A more recent study by Bhaskaran et al. (2020) was based on ESG data for 1,317
emerging market firms and 3,569 developed market firms. However, most observations in this
study were still based on data from the US, UK and other developed markets. Similar findings
apply to almost all studies drawing upon international ESG panel data, irrespective of the ESG
data used (see, e.g., Pollard et al., 2018). Finer-grained analyses of ESG performance in
developing countries that consider the local environments in which a firm operates, distinguish
between ‘cosmetic’ and substantive ESG issues, and recognize different levels of data quality
are still largely missing (Mobius & Ali, 2021).
The limited availability of ESG ratings outside of developed markets has been driven by several
factors: First, and as demonstrated by Eccles and Stroehle (2018), the origins of ESG metrics
and ESG rating organizations can be traced back to the 1970s, when stakeholders including
NGOs demanded information about corporate involvement in controversial issues such as
nuclear weapons development or South Africa’s apartheid regime. The authors traced the
history of nine ESG data and analytics organizations, all with origins in the US, UK and
Europe, and show how these organizations evolved from a focus on providing information of
relevance to investors and stakeholders, to eventually becoming ESG rating providers (which
included several mergers and acquisitions amongst rating organizations). Second, several other
institutional constraints have limited the uptake of ESG ratings globally. These include limited
investor interest in nascent and shallow capital markets, limited disclosure requirements (and
thus also limited data availability), as well as weak institutions, and corporate ownership
structures which lead to poor disclosure outcomes (Odell & Ali, 2016; Orsato et al., 2015).
However, at the same time, there is recognition that it is precisely those factors that also warrant
a greater focus on ESG in emerging and frontier markets (Odell & Ali, 2016).

5
In recent years, the ESG agenda has been accelerated by initiatives such as the adoption of the
United Nations Principles of Responsible Investment (UNPRI) and the United Nations’
Sustainable Development Goals (SDGs), all well as the proliferation of internationally
recognized accounting frameworks such as the Global Reporting Initiative (GRI) which also
provide guidelines for companies to report on ESG performance (Arun et al., 2020). In
addition, many countries have introduced ESG disclosure requirements – for instance, all
ASEAN-6 countries (Singapore, Malaysia, Thailand, Vietnam, Indonesia, and the Philippines)
now require sustainability reports or disclosures for listed companies (Pan, 2021). The creation
of emerging market indices (e.g., the FTSE Emerging Index) and related ETFs provide
investors with new opportunities. These developments have led to several implications: First,
ESG ratings providers have faced pressures to increase their ESG ratings universe to inform
investors of ESG risks related to emerging market opportunities. Second. the literature has
started to move beyond merely documenting differences in ESG disclosure practices due to
differences in country-level environments and has instead started to analyze the implications
of ESG for firms, investors, and markets (see following sections). Work has specifically
focused on exploring three areas (1) studies that investigate the ESG-FP relationship for
emerging markets, (2) studies that track the ESG performance of multinational companies
(MNEs) in the various countries, and (3) studies that have started to engage with ESG-related
risks on a country level (see Figure 1 for a summary). These streams are reviewed in further
detail below.

Figure 1: Emerging Research on ESG in Multinational Business Research

ESG-Financial ESG performance of ESG-related risks on a

Performance Relationship MNEs country level

Emerging Research Direction Emerging Reserach Direction Emerging Reserach Direction

- Studies testing the ESG-FP - Studies monitoring ESG - Studies attempting to capture
relationships within and across performance of MNCs in the the ESG dimensions of countries
emerging market settings various markets through contruction of indices
- Focus on understudied - Focus on how MNEs adopt and - Foucs on capturing issues such
contexts, including Asia, Africa, enact ESG practices in as a country’s attractiveness as
Eastern Europe, the Middle East, jurisdictions with less stringent an investment destination as
and Latin America institutional pressures well as risk factors

Findings and New Theoretical Findings and New Theoretical Findings and New Theoretical
Directions Directions Directions
- There might not neccessarily a - The literature is only emerging - Emerging studies are using
positive ESG-FP relationship in with limited insights into the country-level ESG data to study
emerging markets role of EMNEs issues such as IPO underpricing
- Greater theoretical attention - Greater theoretical attention - Greater theoretical attention
needed to identify limiting needed to identify how needed to justify the various
institutional conditions and companies diffuse best practice, ESG dimensions for rating &
variations at firm/country levels also across supply chains ranking of countries

6
The ESG-Financial Performance Relationship
A first emerging body of work studies ESG-FP relationships for firms in emerging market
settings. Within this body of work, there is a substantially new focus on documenting the ESG-
FP relationship for previously understudied settings, including Latin America (e.g., Duque-
Grisales & Aguilera-Caracuel, 2021), Asia (e.g., Lee et al., 2016; Ng et al., 2020; Yoon et al.,
2018), the Middle East and North Africa (e.g., Al-Hiyari & Kosi, 2021), and the so-called
BRICS countries (Brazil, Russia, India, China, and South Africa) more broadly (e.g., Ali et al.,
2021; Garcia et al., 2017; Koroleva et al., 2020; Miralles-Quirós et al., 2018; Rajesh, 2020).
Of these countries, China continues to receive significant research attention (e.g., Deng &
Cheng, 2019; Weber, 2014, 2017; Zhang et al., 2021; Zhao et al., 2018), which has been driven
by the opening of its financial markets to foreign investors and the introduction of more
stringent environmental policies, including recent commitments towards carbon neutrality in
2060. Recent data show that over 1,000 Chinese A-share companies (i.e., companies listed on
the Shanghai and Shenzhen exchanges) had published annual ESG reports, up from just 371
companies in 2009. Of these companies, about 130 have dual listings in Hong Kong, where
ESG reports are mandatory (World Economic Forum, 2021). Studies have also examined the
role of ESG and its contribution to value creation in Islamic finance (e.g., Paltrinieri et al.,
2020; Peng & Isa, 2020).
While this work has roots in confirming (and questioning) the validity of ‘Western’ ESG-FP
theory in emerging markets, it pays greater attention to limiting institutional conditions such
as weaker governance, higher levels of political risk and/or heightened levels of corruption
(Duque-Grisales & Aguilera-Caracuel, 2021). In addition, the literature also pays greater
attention to variations within and across companies and countries by drawing on theories of
national business systems, comparative capitalism and stakeholder engagement (Ortas et al.,
2019). Some studies replicate findings of generally positive associations between ESG and
financial performance for developing country contexts (see Bahadori et al., 2021; Shakil et al.,
2019); However, several studies contradict this finding when focusing on emerging markets.
For instance, Garcia et al. (2017) investigate the ESG-FP relationship for a sample of firms
from BRICS countries. The authors analyze ESG ratings obtained from the Thomson Reuters
Eikon database and report on a negative association of financial performance with
environmental performance. A more recent study by Duque-Grisales and Aguilera-Caracuel
(2021) focuses on the ESG-FP relationship of multinationals from Brazil, Chile, Colombia,
Mexico, and Peru. The results point to a negative association between ESG ratings (also
retrieved from Thomson Reuters) and multilatinas’ financial performance. The authors
conclude that this might result from the challenges and costs of implementing ESG initiatives
in the setting studied, but also find a moderating effect of financial slack and geographic
international diversification. These findings suggest that there is a much greater need to further
study aspects such as agency problems and inefficient resource allocation in international
settings.
ESG performance of multinational companies (MNEs)
A second, much smaller body of emerging work focuses on the ESG performance of
multinational companies in the various markets in which these companies are operating (Park,
2018; Salsbery, 2021). This body of work examines how MNEs adopt and enact ESG practices
across different markets and jurisdictions. The body of work has origins in theories on CSI and

7
is based on concerns that ESG performance might be lower in jurisdictions with less stringent
formal and social institutional pressures (Brammer et al., 2021), thus leading to the assumption
that emerging country contexts might place fewer demands on companies to adhere to superior
ESG performance. However, prior research has primarily studied the companies headquartered
in developed economies (particularly the U.S.) and the uptake of corporate sustainability
practices (broadly defined) among international subsidiaries. The question of how the
internationalization of emerging market multinationals (EMNEs) affects their ESG
performance in other host countries has remained largely unexplored (Park, 2018), even though
the internationalization of EMNEs has attracted attention in the literature (e.g., Gammeltoft et
al., 2012).
Recent work in this area (Salsbery, 2021) has further expanded on theory in the international
business (IB) field by examining MNE’s ESG behavior at home versus abroad, based on the
location of its headquarters (in a developed versus developing economy). MNEs can choose to
‘export’ the ESG norms and practices of the home market (the location of its headquarters) or
can ‘adopt’ norms and practices of the host market (location of foreign operations). Findings
from the study by Salsbery (2021) show that MNEs headquartered in developed markets
behave more irresponsibly in emerging markets than they do at home, while emerging market
MNEs behave more responsibly when operating in developed markets. The study concludes
that these results can be attributed primarily to governance (rather than social or environmental)
factors. However, the main drivers behind MNE’s and especially EMNE’s engagement in ESG
(as well as their ESG performance internationally and in the context of global supply chains)
are still undertheorized. Factors such as organizational legitimacy to overcome the liability of
foreignness have been explored for cross-listed companies and might play a role (Del Bosco &
Misani, 2016), but further research is needed to understand their impact in the context of ESG.
There is limited research that focuses on the diffusion of ESG practices within and across
MNEs, and research has not yet documented if factors such as firm size, industry or home/host
country factors accelerate or hinder the diffusion of ESG practices.
Frameworks for assessing ESG-related risks on a country level
In addition to firm-level ESG ratings, studies also focus on analyzing the ESG dimensions of
countries. Dyck et al. (2019), for example, construct a dataset reflecting country-level ESG
norms based on data from the Environmental Performance Index (measuring country-level data
on health and ecosystem vitality) and the World Values Survey (assessing peoples’ values and
beliefs). Using the country-level dataset as a proxy, Dyck et al. (2019) conclude that
institutional investors from countries with strong norms have a positive impact on companies’
ESG policies. Increasingly, ESG rating providers that have traditionally offered scores at the
corporate level are now also focusing on providing country-level ESG data (e.g., MSCI's ESG
Government Ratings which quantify a country’s exposure to ESG risk-weighted against the
management of the risk), primarily with the view to rate a country’s attractiveness as an
investment destination and to extend the insights offered by traditional analyses of sovereign
debt and a country’s creditworthiness (see MSCI, 2020). In addition, data have also been made
available by the World Bank in the form of an ESG Data Framework. The framework offers
ESG data on country, regional and global levels for issues such as emissions and pollution,

8
poverty and inequality or human rights, and is linked to the sustainable development goals
(SDGs).2
Researchers have started to use these country-level ESG datasets in various contexts, for
instance, to study IPO underpricing in countries with different ESG ratings (Baker et al., 2021).
Alternative metrics are provided by companies such as RepRisk - the RepRisk Country ESG
Risk Index quantifies business conduct risk exposure related to country-level ESG issues – it
is therefore technically not a country-level ESG rating but a business risk assessment. However,
analyses of country-level ESG scores have raised some concerns that they might lead to
potentially biased insights. For instance, a report by the World Bank Group (Gratcheva et al.,
2020) found strong correlations between national income and the ESG pillars, which the report
refers to as “ingrained income bias” (pg. 31). Consequently, country-level ESG scores might
be biased towards ‘richer’ countries with higher prosperity, which could result in a
misallocation of capital to wealthier countries. While scores can certainly be adjusted to
account for this bias, the report voiced concern that the measurement of country-level ESG risk
might therefore not fully reflect sustainable investment opportunities and calls for greater
methodological transparency around these issues.

Discussion and future research

While the emerging body of work adds an important dimension to the identification and
awareness of ESG issues globally, numerous unresolved issues become evident (see also Figure
2). First, the increasing popularity of ESG ratings has primarily originated in developed
countries, meaning that ESG frameworks have been built to assess corporate sustainability as
it relates to firms in their ‘home’ countries. Due to their origins, ESG scores have been
primarily developed for companies listed on U.S. or European/UK stock exchanges, meaning
that ESG frameworks have been tied to a company’s listing in these markets. This has
important implications, for instance, regarding the applicability and transferability of these
frameworks to study ESG in emerging markets. While ESG ratings are now being developed
for a larger number of markets, research has shown that ESG scores for firms in emerging
markets are subject to bias and are not weighted by materiality, which can be misleading for
using the data in research but also in portfolio construction and performance (European Centre
for Corporate Engagement, 2016; Mobus & Ali, 2021). Similar issues also apply to country-
level ESG scores, as discussed above. Second, while ESG scores (depending on the data
provider) do factor in international firm activities (e.g., Human Rights and Child Labour
Policies) these are often not captured in detail and not mapped across the corporate supply
chain where ESG issues are prone to happen. Third, ESG scores do not integrate views and
voices from various local stakeholders that are impacted by firm activities, especially
Indigenous communities (see Pelosi and Adamson, 2016). These issues are further discussed
in the following sections.
While there are certainly calls to consolidate and standardize ESG information to address the
above-mentioned discrepancies, Eccles and Stroehle (2018) raised the valid point that full
convergence on ESG issues and measurements is unlikely given the development of proprietary
rating systems by individual data vendors. This raises the perhaps broader question of to what

2
See https://datatopics.worldbank.org/esg/ for a full description of the ESG indicators and datasets.

9
extent information captured through private market-based approaches can reflect ESG in
emerging markets. Ho and Park (2019) seek to answer this question by comprehensively
reviewing issues associated with private market-based approaches to ESG disclosure across
South Africa, Brazil, the U.S., the EU, the United Kingdom, Hong Kong, and mainland China.
The authors detail the complex nature of ESG disclosure requirements (including each
jurisdiction’s legal and institutional framework and interactions of public regulation with
private ESG disclosure frameworks) suggesting that a public-private hybrid approach to ESG
disclosure might ultimately be inevitable if more consistent and comprehensive disclosures are
meant to be achieved. However, for purposes of advancing research (and industry practice) in
this area, it is perhaps of more immediate importance to identify possible issues and
shortcomings associated with using ESG ratings in cross-country studies and for assessing the
performance of multinational enterprises (MNE) and emerging market multinationals
(EMNEs). This will allow research and practice to move forward with more nuanced inquiries
and with frameworks that are not solely based on Western norms.

Figure 2: Areas for Future Research

Local and
Indigenous
Communities

Supply chain
analysis

Applicability and
transferability of ESG
frameworks

Applicability and transferability of ESG frameworks

As detailed in the introduction, the rapidly increasing area of SRI has sparked a substantial
scholarly debate regarding whether higher ESG-related performance is helping to generate
value for both shareholders and stakeholders impacted by firms’ ESG practices. As this article
has shown, this question is now increasingly being investigated in emerging markets, but
findings have remained inconclusive. Prior research has already pointed to several empirical

10
challenges associated with studying the ESG-FP relationship: Studies have used different ESG
definitions and metrics which had created difficulties in arriving at definite conclusions (Eccles
& Stroehle, 2018; Whelan et al., 2020). The inclusion of other variables such as different
moderating and control variables (or lack thereof) can further obscure the ‘true’ relationship
between ESG-related performance and financial performance (Carroll & Shabana, 2010;
Margolis et al., 2007). As identified above, there is a likely need to further study aspects such
as agency problems and inefficient resource allocation as they relate to the uptake of ESG
initiatives in emerging markets. In addition, prior research has used different samples (e.g., in
terms of industry focus, timeframes, and so on), and has also used different financial
performance measures (ranging from various ‘rate of return’ measures to the use of market
returns, see Beck et al., 2018; Orlitzky et al., 2003), thus making comparisons of findings
across sectors and countries difficult. These issues will require consideration in research in
emerging market contexts, especially for studies seeking to compare companies’ ESG
performance across different contexts.
Studying the ESG-FP relationship in emerging markets faces additional challenges due to less
stringent disclosure environments and lower levels of transparency (Bahadori et al., 2021;
Hoang, 2018). Mobius and Ali (2021) offer a discussion of difficulties associated with
assessing ESG-related performance at the firm level in emerging markets and describe different
cases in which ESG ratings failed to accurately identify a firm’s ESG performance. The main
point that Mobius and Ali (2021) raise concerns disclosure practices: The authors identify a
company that received a mediocre ESG rating by a well-known ESG rating provider, mainly
because it was ranked as an ESG laggard for its sourcing practices. However, further analysis
suggested that the company received a low score as it was not disclosing its policies and
statements – which might not have been an accurate reflection of the company’s actual ESG
performance and actions. In this instance, the ESG scores may have rather ranked the existence
of ESG-related disclosures. A fundamental problem is not just related to data availability and
reliability, but also to the ability to ‘export’ ESG frameworks to assess ESG in different
contexts that are characterized by vastly different cultural and contextual factors (Elg et al.,
2017). At the aggregate level, ESG scores for firms in emerging markets were found to be
impacted by size, sector, and country (location) biases, meaning that ESG scores can vary
substantially when considering these factors (European Centre for Corporate Engagement,
2016). Similar issues arise for country-level ESG scores, as discussed above.
Other issues relate to the ability of ESG ratings to ‘detect’ corporate governance failures and
to capture issues of materiality in emerging markets. Regarding the detection of governance
failures, Mobius and Ali (2021) detail a case from India’s banking sector where ESG ratings
did not accurately flag concerns about poor corporate culture and lending practices. This issue
does arguably not just apply to ESG ratings in developing markets. For instance, a study by
Utz (2019) found that aggregated ESG scores cannot be used as reliable proxies for forecasting
the likelihood of corporate scandals, which is primarily due to the retrospective analysis of
companies’ ESG practices. Future research will be required to answer questions such as to what
ESG scores can be used for assessing credit scores or risk governance in emerging markets,
and how they can be weighted to account for the individual circumstances of a firm. Regarding
the ability to capture issues of materiality in emerging markets, the question arises if all issues
that are captured by ESG frameworks are indeed driving the ESG performance of companies
in emerging markets. The issue of materiality is a key concept in the accounting discipline and

11
refers to the significance that is ascribed to data and information (and the omission thereof) in
the decision-making process. An example might illustrate this point – reductions in a firm’s
carbon emission levels are likely to have a significant impact on risk-adjusted return for firms
in material-intensive industries, but not in other industries (e.g., professional services) (LaBella
et al., 2019). Similarly, for companies in emerging markets, some of the E, S and G dimensions
are likely to face key sustainability issues that present risks and drive performance, for instance
in areas such as supply chain risks (Odell & Ali, 2016, see also discussion below). Further
research can assess how materiality can be determined and factored into the ESG assessment
process.
Supply chain analysis
A second underexplored area concerning the use of ESG ratings in multinational business
research is the mapping of ESG activities across home and host country activities, and
especially across corporate supply chains. For large global companies, the distinction between
being headquartered in a developed versus developing country might increasingly be less
relevant given the global extent of many companies and their operations. However, a key
challenge for these companies is to comprehensively track their supplier networks and to be
able to map out and understand the ESG performance of suppliers, but also of the suppliers of
suppliers, and so on (i.e., examining multiple tiers). Often, significant ESG risks are lower
down in supply chains, for example, a factory associated with forced labor might be involved
at some stage in the fashion supply chain, but unless the poor practices within the factory are
uncovered and the involvement of the factory within the supply chain is made visible, it would
largely go undetected. This leads to an increasing interest to incorporate a wider ESG lens into
procurement decisions. Various IB scholars have already proposed that research needs to pay
greater attention to MNEs’ governing role within and beyond global supply chains to lessen
governance inadequacies – for instance, concerning modern slavery, human rights and working
conditions (e.g., Caruna et al., 2021; Burmester et al., 2019; Stringer & Michailova, 2018), but
also issues such as corruption (Stevens &Newenham-Kanhindi, 2021). This will have a direct
impact on the availability of data and frameworks for the ESG context as well.
Some prior research has offered some theoretical observations regarding the challenges of
managing and monitoring corporate activities across supply chains. For instance, a study by
Kim and Davies (2016) tracking supply chain sustainability finds that firms with a greater level
of diversification as well as larger and more dispersed supply chains found it more difficult to
track the provenance of their products (in this case, conflict minerals). Further theory
development is required to adequately conceptualize ESG issues in supply chains, also
considering the commonalities and distinctiveness of various issues (Caruna et al., 2021).
Underlying issues related to gathering and analyzing data are not easy to address and will
require novel approaches to track ESG especially also among small and medium-sized firms
that might be operating internationally or might be embedded in international supply chains,
but are not producing any ESG disclosures. Some ESG ratings providers are now offering
customized solutions to track ESG issues among corporate supply chains, which is often based
on manual data searches. Research has recently also expanded to examine how novel
technological solutions including blockchain applications can be implemented across supply
chain systems to help trace the provenance of goods and thus enforce integrity (e.g., Berdik et
al., 2021). However, this work is still at an early stage and will require further development
before reliable ESG data can be derived.

12
Local and Indigenous Communities
A third underexplored area concerning the use of ESG ratings in multinational business
research is the treatment of issues of importance to local and Indigenous communities within
ESG ratings. While some companies selling to governments (e.g., infrastructure projects) have
faced contractual requirements to engage local communities and supplies and needed to report
on the scope of the engagement, there is now increasing awareness amongst policy-makers,
investors, and corporate decision-makers that many companies face significant ESG impacts
from local community engagement. A study by Newenham-Kahindi (2015) on the
implementation of sustainable development programs by MNEs across rural communities in
Tanzania documents the challenges of implementing locally-oriented strategies that
incorporate meaningful employee and community engagement, which also means that MNEs
need to overcome their liability of foreignness (Newenham-Kahindi & Stevens, 2018). Pelosi
and Adamson (2016) draw further attention to the challenges faced by Indigenous communities
and argue that there is a need to better manage the “S” in ESG. The authors discuss findings
from an Indigenous Rights Risk Report in 2014 which assessed the security filings of 52
publicly listed U.S. oil, gas, and mining companies to identify potential violations of
Indigenous Peoples’ rights. The report examined 330 international projects operated by these
companies on or near Indigenous land, finding that 35% (115) of projects had a high risk of
Indigenous community opposition or violations of Indigenous Peoples’ rights, 54% (177) had
medium risk exposure, and only 11% (38) had low-risk exposure. The main issues identified
were inadequate governance and oversight by corporate boards, but also the lack of data and
insights for appropriate engagement.
Some ESG rating providers assess a firm’s policy on Indigenous people, usually involving land
rights. For instance, ESG rating provider Sustainalytics includes society and community-
related controversies or incidents in its ESG ratings and evaluates if a company has a “Policy
on Indigenous people and land rights”. Indictors by ESG rating provider MSCI KLD assess
concerns and strengths regarding a firm’s approach to “Indigenous Peoples’ Relations”,
examining if a company has established relations with Indigenous People in areas where
proposed or current operations take place. Other ESG rating providers, such as Refinitiv and
Bloomberg, have no specific indicators for Indigenous issues. Instead, Refinitiv assesses if a
company is involved in ethical issues controversies, while Bloomberg assesses the amount of
community spending such as donations to the local community.
Further research can strengthen current ESG approaches by examining ESG issues of
importance to the various Indigenous communities within and across countries. For instance,
current ESG ratings are not considering how firms treat cultural artefacts of importance to local
communities. The controversy surrounding mining giant Rio Tinto illustrates this point – the
company was responsible for the destruction of the Juukan Gorge caves, a 46,000-year-old
sacred Aboriginal site in Australia’s Pilbara region, in 2020. While the destruction was
technically legal and the company received permission for the demolition under (outdated)
laws, it refused to update its plan when the archaeological importance of the site became clear.
The incident also revealed a substantial disconnect between Rio Tinto’s public commitments
to responsible mining, and Aboriginal land rights, and its actions. The destruction was deeply
traumatic for the Aboriginal population who lost an important cultural site. As evident from
this example, there is scope for multinational business research to move beyond home and host

13
country advantages to further examine how companies relate to Indigenous Country and
Indigenous People.

Conclusion
The article identifies emerging literature that has started to focus on tracking the development
and uptake of ESG ratings in the international context. It discusses three emerging research
streams: Research examining the ESG-FP relationship in emerging markets, research tracking
the ESG performance of MNEs and EMNEs in the various countries and regions they are
operating, and frameworks for assessing ESG-related risks on a country level. While the
emerging body of work adds an important dimension to the identification and awareness of
ESG issues globally, numerous unresolved issues become evident. ESG frameworks have been
built to assess corporate sustainability as it relates to firms in their ‘home’ countries (typically
with a focus on developed countries), with limited applicability and transferability to emerging
markets. International firm activities are often not captured in detail and not comprehensively
mapped across firm subsidiaries and a firm’s corporate supply chain (where ESG issues are
prone to happen), and ESG scores do not comprehensively integrate views and voices from
various local stakeholders that are impacted by firm activities, including Indigenous
communities.

14
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