Economic Freedom and Environmental, Social, Governance Practices: An Analysis of the Financial Sector in the Americas

Abstract

Through the theory of legitimacy and the theoretical perspective of New Institutional Economics, the purpose of this paper is to analyze the effect of economic freedom over the relationship between Environmental, Social, Governance (ESG) practices and profitability. The sample was finance companies located in the Americas, between 2017 and 2020, using the Refinitiv Eikon® database. The analysis used data modeling in a hierarchical panel. Results demonstrate that ESG practices have a positive and significant impact on profitability. Individually, only the social variable showed a positive and significant relationship over profitability. As for the moderating effect of economic freedom, it was shown that economic freedom enhances the relationship between an ESG index and profitability, and only enhances the relationship between corporate governance and profitability when analyzed individually. Furthermore, findings imply that a country’s institutional quality has an important influence on ESG practices and profitability.