Abstract
This study examines the impact of real interest rates on ESG performance and risk using a global sample of 30,069 firm-year observations from 2011 to 2023. We find that higher real interest rates are linked to poorer ESG performance and greater ESG risk. We employ multiple machine learning models, including linear models, random forest, and gradient boosting, to triangulate our results across diverse techniques. Our results withstand endogeneity tests, including propensity score matching, entropy balancing, and two-stage least squares. We leverage the Paris Agreement as an exogenous policy shock to identify the causal effect using a difference-in-differences (DiD) framework. The negative impact is more pronounced in more financially open and less-developed economies, during high economic policy uncertainty, in jurisdictions with weaker investor protection, in polluted industries, for non-adopters of the GRI framework, and for firms with weaker governance. Finally, the negative effect of real interest rates on ESG performance intensifies in cultural contexts characterised by high power distance, high individualism, low masculinity, high uncertainty avoidance, low long-term orientation, and high indulgence. Our findings highlight the need for monetary policies that balance economic stability with sustainability goals.