Navigating Climate Challenges: How the Paris Agreement and Capital Shape the Environmental Social Governance (ESG)- Emission Trading Score (ETS) Relationship

We extend existing empirical literature on the relationship between Environmental Social Governance (ESG) and Emission Trading Score (ETS) by including the moderating role of capital and the Paris Agreement. We employed an extensive panel dataset of 6.023 observations from 317 companies across multiple industries and countries from 2005 to 2023. The Two-Step Difference Generalized Method of Moments method is employed to address endogeneity and dynamic behavior inherent in the model. The results indicate that stronger ESG scores increased participation in emission trading through the market (ETS score). However, the Paris Agreement moderates this relationship, suggesting regulatory drivers had a diminishing marginal impact in ESG-mature environments. Capital negatively interacted with ESG since capital-intensive companies prioritized other sustainability strategies over emission trading, which was perceived as less cost-effective. Our results were solid after an array of robustness checks.