Environmental, Social, and Governance Drivers of Economic Growth: Investigating the Mediating Role of Human Capital in Developing Asia

Abstract

In this study, we examine the impact of ESG factors on economic growth and investigate the mediating role of human capital in 22 developing Asian countries over the period 1996-2024. Using panel data, the study employs the System Generalized Method of Moments (SGMM) as the estimation technique. Environmental degradation, measured by CO2 emissions affects economic growth negatively. Conversely, human capital and institutional quality, proxied by the Human Capital Index and Rule of Law, exert positive and significant effect on economic growth. The results further show that the composite ESG index is positively correlated with economic growth. The positive interaction between ESG and human capital demonstrates that the growth-enhancing mediating effect of ESG factors is stronger in countries with higher levels of education, skills, and health. The findings also indicate that foreign direct investment and trade openness contribute to economic growth positively and significantly. Overall, the study concludes that sustainable economic growth requires an integrated development framework that combines ESG-oriented policies, institutional improvements, and, human capital development.