ESG Drivers of Financial Development: A Multimethod Analysis of Domestic Credit to the Private Sector

Arnone, Massimo and Costantiello, Alberto and Drago, Carlo and Leogrande, Angelo (2025): ESG Drivers of Financial Development: A Multimethod Analysis of Domestic Credit to the Private Sector.

Abstract

This paper investigates the influence of environmental, social, and governance (ESG) factors on financial development, using Domestic Credit to the Private Sector by Banks (DCB) as the core indicator of credit market development. To effectively market the research within the broader literature on finance and ESG issues, the authors employ an approach combining econometric analysis, K-Nearest Neighbors (KNN), cluster analysis, and network analysis. By analyzing the impact through the estimation of the model parameters through the impact of instrumental variable estimation on the model parameters (using Two-Stage Least Squares (IV), Random Effects (IV), and First-Differenced (IV) methods), the study confirms that access to clean fuels and natural resource depletion impact the model margins significantly. However, across all the models used in the analysis, the impact of access to clean energy is positive. By analyzing the significance of the issue using the KNN model throughout the research process on the impact of ESG on credit market dynamics across countries, the research demonstrates that the issue is significant. By performing hierarchical cluster analysis on the significance of the research by considering the significance of the issue in its contribution to the impact on credit market dynamics in countries, in terms of climate stress issues being core in influencing the dynamics of credit in countries, through network analysis mapping performed by carrying out research on the topic.

• Item Type: MPRA Paper
• Language: English
• Keywords: ESG, Financial Development, Domestic Credit, Sustainability, Environmental Indicators
• Subjects: C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C38 - Classification Methods ; Cluster Analysis ; Principal Components ; Factor Models; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy; G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O16 - Financial Markets ; Saving and Capital Investment ; Corporate Finance and Governance; Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q5 - Environmental Economics > Q56 - Environment and Development ; Environment and Trade ; Sustainability ; Environmental Accounts and Accounting ; Environmental Equity ; Population Growth

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