Exchange Rate Changes and ESG : Predicting Exchange Rate Changes Using Country Environmental, Social, and Governance Ratings

We examine the ability of country ESG ratings, which assess a country’s performance on environmental, social, and governance (ESG) risk factors, to predict future one-year and two-year exchange rate changes. To conduct the study, we used the annual MSCI ESG Government Ratings from 2008 to 2018 for forty-two countries. Using statistical analysis, we find a significant relationship between a country’s ESG ratings and the future change in the local currency. More specifically, we find that countries with high ESG ratings have significantly better-performing currencies than countries with lower ESG ratings. We find this result when predicting exchange rates one year and two years into the future using a host of controls