Environmental, social and governance (ESG) factors and sovereign risk in Jordan
Abstract
This study examines the impact of environmental, social and governance (ESG) performance on financial risk in Jordan, measured through the lending–deposit spread. A new ESG index and three pillar indices are constructed using annual data from 1990 to 2024. The quantile autoregressive distributed lag (QARDL) model is applied to capture both short- and long-run effects across different states of financial risk. ESG improvements lower spreads, with the strongest effects during stress periods. Governance emerges as the most influential pillar, followed by environmental progress, while social outcomes show weaker and less consistent effects. Macroeconomic fundamentals, income, inflation and debt, remain important but are complemented by ESG factors. For Jordan, credible governance reform and accelerated energy transition are the most effective strategies for reducing financing costs, while social investment remains vital for long-term sustainability. This study advances the ESG–sovereign risk debate in three ways. First, it constructs a novel ESG index for Jordan with distinct ESG pillars, addressing the lack of detailed ESG data for small emerging economies. The index integrates international and national sources to ensure transparency and replicability. Second, it applies the QARDL model to sovereign bond spreads, capturing asymmetric effects of ESG factors across market conditions. Third, results reveal that stronger governance and environmental performance significantly narrow sovereign spreads, especially during periods of financial stress, highlighting ESG’s stabilizing role in emerging economies.