Combining good business and good development: Evidence from IFC Operations

Abstract

Most studies of the links between corporate environmental and socially sustainable actions find a positive link with financial performance. Most of these studies, however, have analyzed firms only in developed countries, and their identifying assumptions do not typically allow causal inferences. We are able to study firm performance in developing countries by using data from investments made by the International Finance Corporation (IFC) across over 1,000 projects between 2005 and 2014 in close to 100 middle- and low-income countries. The IFC provides information on the financial performance of their investments as well as ratings of environmental, social, and governance (ESG) outcomes. It is well established that such data may be affected by random and systematic error and that there is unavoidable endogeneity between ESG and financial performance since profitable firms can afford to behave more sustainably. Using an instrumental variables approach, we find that the relationship between a firm’s sustainability behavior and profits disappears. However, there is some evidence that both sustainability and profits can jointly impact broader private sector development. Our results have implications for how best to blend public and private finance in the cause of sustainable development.