ESG and exchange rate exposure : evidence from emerging markets

Abstract

Research on environmental, social, and governance (ESG) factors has grown rapidly in recent years. However, its effect on firms’ exchange rate exposure remains less explored. This study investigates ESG performance as a determinant of firms’ exchange rate exposure and examines whether firm size moderates this relationship. Using a sample of 230 firms from seven emerging markets between January 2011 and December 2023, the analysis applies a two-step approach to estimate exposure and link it to firm-level ESG scores and the three ESG pillars. The results provide the first evidence that stronger ESG performance is associated with lower exchange rate exposure. Moreover, the findings show that the mitigating effect of ESG weakens as firm size increases, suggesting that smaller firms in emerging markets benefit most from high ESG performance. These insights extend the exchange rate exposure literature by introducing ESG as a novel determinant of exchange rate exposure and highlight the practical relevance of ESG for risk management in emerging markets.Keywords: exchange rate exposure, exchange rate risk, emerging markets, ESG, firm-level governance