Sovereign sustainability, institutions, and FDI: evidence from an EESG framework

Abstract

This study examines the relationship between sovereign sustainability performance and foreign direct investment (FDI) inflows across 94 developed and developing economies over the period 2000–2022. To address limitations in conventional ESG approaches, the study develops a sovereign-level Economic, Environmental, Social, and Governance (EESG) framework that explicitly incorporates the economic dimension alongside environmental, social, and governance conditions. Using two-step System GMM estimations, the analysis accounts for dynamic persistence, unobserved heterogeneity, and potential endogeneity within the panel structure. The findings suggest that sustainability conditions are increasingly relevant to foreign investment decisions, although the effects vary across development levels and sustainability dimensions. In developed economies, governance quality and economic conditions exhibit comparatively stronger relationships with FDI inflows, while the environmental and social dimensions display more mixed associations in developing economies. Governance quality remains the most consistently positive pillar across most specifications, while the effects of environmental and social performance are more conditional on economic sustainability and development context. Additional robustness analyses using reduced-instrument GMM, Driscoll–Kraay fixed-effects estimations, and alternative EESG weighting structures produce broadly consistent results. The study contributes to the sustainability and international investment literature by integrating macroeconomic, institutional, environmental, and social dimensions within a unified sovereign-level sustainability framework. Overall, the findings suggest that the investment relevance of sustainability depends on broader institutional and macroeconomic conditions alongside sustainability performance itself.