Analyzing the Impact of Corporate Social Responsibility and ESG Ratings on Investor Preferences and Capital Allocation in Global Financial Markets

Abstract

The paper was exploring how the practice of corporate social responsibility (CSR) and environmental, social, and governance (ESG) ratings force investors to choose and allocate capital to assets in the global financial markets. A quantitative research design was sought whereby 100 publicly listed companies in North America, Europe and the Asia- Pacific were surveyed within the years 2020-2023. Regression results showed greater association between ESG ratings and better CSR scores and greater institutional ownership as well as greater net capital flows. Such relationships were especially evident in the developed markets, where the regulatory regime and social attitudes towards sustainability were more developed. We used further robustness checks in which propensity score matching methods verified that all the results were intact, and that firm ESG performance brought in more investor interest and monetary funds even after considering the impact of firm size as well as profitability and industry factors. The findings sustained the increasing relevance of incorporating sustainability activities as a component of corporate strategy to boost investor confidence, raise financial funding and firm competitiveness in the long run. Along with this, the paper has made realistic suggestions to company executives to enhance the ESG initiatives and a better disclosure structure that should be put in place by the policymakers and reduce greenwashing exposure. Qualitative investigations, time-encompassing consequences, and cross-regional variations should be probed through future investigation to add depth to insights that would help appreciate the integration of ESG to the investment decision-making process. On the whole, this research assisted in developing sustainable finance in the global context.