ESG and Financial Performance of Microfinance Institutions in South and Southeast Asia: Does Financial Development Matter?

Abstract

This research empirically explores the moderating role of financial development on the relationship between ESG activities and the financial performance of microfinance institutions. The study employs a sample of seventy MFIs in the South and Southeast Asian region. The results find that financial development plays a detrimental role, and negatively moderates the relationship between sustainable activities and the financial performance of MFIs. The findings also show the substitution effect of financial development. The results reveal that the main effect of financial development is positive and enhances the MFI's financial performance, whereas financial development assuages the effect of ESG engagement on the MFI's financial performance. The research contributes to the burgeoning literature by providing new evidence on the moderating role of financial development on ESG engagement and MFI's financial performance.

Keywords: ESG; Sustainable finance; financial development; Microfinance Institutions.