The Cultural Contingency of Sustainable Finance: How National Culture Moderates Financial Development–ESG Nexus

ABSTRACT We examine whether national culture conditions the capacity of financial development to improve country‐level ESG performance. Using a panel of 46 developed and emerging market economies over 2002–2021 and the Lewbel (2012) heteroskedasticity‐based instrumental variables estimator to address endogeneity, we find that financial development significantly enhances ESG performance. The positive effect, however, masks substantial cross‐cultural variation: individualism and masculinity amplify the finance–ESG relationship, while power distance and uncertainty avoidance systematically suppress it. We further show that cultural constraints are most binding in emerging markets, where uncertainty avoidance exerts a considerably stronger attenuation effect than in developed economies. These results are robust to LIML estimation, Driscoll–Kraay corrections for cross‐sectional dependence, and GLOBE‐based cultural measurement. Taken together, our findings carry three implications: (i) the returns to financial development for sustainability are real but culturally contingent, meaning that financial deepening alone is insufficient without cultural alignment; (ii) policymakers in high power distance and uncertainty avoidance contexts require culturally sensitive institutional reforms alongside financial sector development; and (iii) multinational firms and global investors must account for cultural moderators when assessing country‐level ESG risk and opportunity across institutionally heterogeneous settings.