Financial development, investor protection, and corporate commitment to sustainability

Abstract

PurposeThe purpose of the study is to investigate whether the relationship between financial development/investor protection and corporate commitment to sustainability is related to social contagion, neighborhood effect, and community effect.Design/methodology/approachThe study applies correlation analysis, difference tests, and regression model to a sample comprised of 369 large firms listed on FTSE Global 500 covering 11 industries, located in 31 countries. This paper examines three country‐level variables, financial development index, shareholder rights index, and strength of investor protection, and five corporate commitment to sustainability measures, Carbon Disclosure Leadership Index, Greenhouse Gas (GHG) emissions (direct, electricity indirect, and other indirect GHG emissions), and the corresponding carbon intensity.FindingsThe results support the view that the relationship between financial development/investor protection and corporate commitment to sustainability is associated with social contagion, neighborhood effect, and community effect. Companies are more willing to commit to carbon disclosure for countries with higher financial development. Corporate commitment to sustainability is lower if neighbor countries' financial development or shareholder rights are high. Similarly, companies place less strategic importance on climate change issues if their community countries protect investors better, notwithstanding their relatively low level of other indirect GHG emissions.Research limitations/implicationsFuture research may build on this research by supplementing the current data with more variables such as domestic financial sector liberalization or measures, such as business environment, financial stability, and size, depth, and access. The negative relationship between commitment to sustainability and investor rights suggests that investor rights and commitment to sustainability are singing different tunes. Corporate commitment to sustainability does not keep pace with investor rights especially for countries with better shareholder rights or investor protection.Originality/valueThis study provides a new perspective on the relationship between financial development/investor protection and commitment to sustainability. This study contributes to the existing literature by using five measures of corporate commitment to sustainability based on firm‐specific data using a sample of the FTSE Global 500. This paper provides a better understanding of the relationship between country‐level characteristics and commitment to sustainability in an environment where global integration is relatively high.