Journal of Ekonomi 11 (2024) 34–39

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A new pathway to sustainability: Integrating economic dimension (ECON) into

ESG factors as (ECON-ESG) and aligned with sustainable development goals
(SDGs)

a,b,, * Cem Işık, c. Serdar Ongan, d. Hasibul Islam

a,,Department of Economics, Faculty of Economics and Administrative Sciences, Anadolu University, Tepebaşı,
Eskişehir - Türkiye, b, Azerbaijan State University of Economics (UNEC) Clinic of Economics, Baku, Azerbaijan,
c Department of Economics, University of South Florida, Tampa, USA, d Department of Business Administration,

Varendra University, Rajshahi, Bangladesh

ARTICLE INFO ABSTRACT

Keywords: The concept of traditional ESG (Environmental, Social, Governance) factors is a sine qua non for
sustainability and constitutes the cornerstones of a sustainable economy. However, although the
ECON-ESG factors inevitable impacts of economic activities on sustainability, it lacks the economic dimension
SDGs (denotes ECON). Therefore, this study proposes to complete this missing leg, integrate economics
ESG factors into ESG, and obtain and introduce ECON-ESG as a composite sustainability concept. While ESG
New form of sustainability represents firm and microeconomics-based sustainability based only on environmental, social,
Economic factors
and governance factors, ECON-ESG also incorporates the economy and represents sustainability,
Sustainability
including macroeconomics affecting the firm's performance. Additionally, the linkage between
ECON-ESG and SDGs will provide scholars with a composite form variable for use in sustainability
models.

I. Introduction

Integrating Environmental, Social, and Governance (ESG) factors into sustainability has become essential to assessing a country's
sustainable development pathways (Işık et al., 2024a, 2024b). However, ESG considerations mainly focus on firm-based, often lacking a direct
linkage with economic fundamentals. Therefore, we transform this traditional three-component concept (ESG) into a four-component form by
adding the "economics pilar" and making it ECON-ESG. This new form (concept) will fill the gap in the literature of studies that use ESG factors
without considering the effects of economic metrics on sustainability.
This proposed form of sustainability can serve many of the purposes listed below for policymakers and scholars:
• Firm-based microeconomic ESG incorporates macroeconomic content with added macroeconomic indicators such as GDP, unemployment,
and interest rates. Therefore, ECON-ESG factors may represent sustainability, including the economy, with the inevitable impact of
macroeconomics since firms are directly affected by macroeconomic policies.
• Investors increasingly recognize the importance of economic sustainability alongside ESG considerations. Including economic factors into
ESG and making it ECON-ESG will enhance its relevance to investors seeking to align their investments with both financial and sustainable
development goals.
• ECON-ESG form will encourage policymakers to adopt policies that foster sustainable economic growth while addressing environmental
and social challenges. This alignment promotes a balanced approach to policymaking that supports long-term prosperity and well-being.
• Economic stability is closely linked to overall sustainability. Assessing economic factors alongside ESG metrics will help identify potential
risks and vulnerabilities, enabling stakeholders to implement proactive measures to mitigate economic, environmental, and social risks.
• Our proposed form, ECON-ESG, links the United Nations’s sustainable development goals (SDGs) by using some selected indicators (shown
in Table 1) of 232 SDG indicators. These selected indicators, such as CO2 emissions, control of corruption, and government effectiveness,
correspond to the environment (E), social (S), and governance (G), respectively. Following these indicators, we add macroeconomic
indicators (ECON) to ESG. This link between ECON-ESG and SDGs is necessary because the Sustainable Development Goals indicators are

∗ Corresponding author. E-mail address: cemisik@[Link] (C. Işık).

Received: 11 March 2024; Received in revised from 28 March 2024; Accepted 01 April 2024
[Link]

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numerous and clearly defined. However, ESG factors are not clearly defined like SDG factors. Therefore, this link will enable us to integrate
Sustainable Development Goals with ECON-ESG and have a holistic perspective on sustainability.
• This link will also enable us to question whether the results of empirical studies using the ECON-ESG form harmonize with the SDG factors
within the framework of the used SDG indicators.
• The same link between ECON-ESG and SDGs will provide scholars with a composite form variable for use in sustainability models.
Policymakers can leverage SDG indicators to identify areas where ESG factors can be incorporated into policy frameworks, leading to more
holistic and effective policy solutions.
• The same link may improve accountability and reporting mechanisms to measure progress; policymakers can enhance transparency and
accountability in monitoring the effectiveness of policies and initiatives promoting sustainability.

2. Literature Review

Various studies incorporate recommendations from ESG analysis reports provided by asset managers and rating agencies when
constructing the composite ESG index (Capelle-Blancard et al., 2019; Diaye et al., 2022; Işık et al., 2024a, 2024b). These reports are from various
entities such as VIGEO (2013), HSBC AM (2013), Natixis AM (2013), MSCI, ESG Research (2011), and the emerging market debt team at
Neuberger Berman (2014). Despite their comprehensive coverage, concerns persist regarding the reliability and uniformity of these ratings
(Chatterji et al., 2009). Many ESG ratings focus on evaluating policies and occasionally superficial actions rather than quantifying actual
reductions in environmental or social impacts and associated risks (Gonenc and Scholtens, 2017).

3. Indicators Used for ESG Factors

Işık et al. (2024a, 2024b), Diaye et al. (2022), and Capelle-Blancard et al. (2019) have underscored the extensive range of factors utilized in
computing Environmental, Social, and Governance (ESG) indices. Environmental metrics encompass considerations such as air quality, water
resources, forest conservation, and the integration of renewable energy sources. Social indicators encompass human capital development,
demographic dynamics, healthcare provisions, employment dynamics, and efforts towards gender equality. Governance criteria commonly
include evaluations of democratic institutions and the implementation of policies aimed at ensuring safety and effective governance. Table 1
describes the detailed explanation of individual ESG factors.

Table 1 Measuring ESG Indicators

Dimension Measuring Items
Renewable energy consumption
Combustible renewable energy (% of total energy)
Renewable electricity output
Environmental Forest area
Control air pollution (CO2 emissions, Methane emissions, Nitrous oxide emission)
Natural resources depletion
Access to clean fuels and technologies for cooking
Waste water treatment
School enrollment secondary
Health expenditure, public
Life expectancy
Social Population density
Female to male Ratio
Gender parity index
Non-vulnerable employment
Control of corruption
Regulatory quality
Governance Rule of law
Government effectiveness
Political stability and absence of violence/terrorism

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4. Indicators Used for Economic Factors

The traditional ESG framework provides valuable perspectives on environmental stewardship, social responsibility, and governance
practices. However, it tends to neglect the direct influence of economic factors on sustainability outcomes at the national level. Economic
performance, encompassing indicators like GDP growth, unemployment rates, and income distribution, significantly shapes a country's capacity
to tackle environmental issues, foster social equity, and maintain effective governance standards. Yet, the existing gap between economic factors
and ESG metrics hampers policymakers' and stakeholders' capacity to devise efficient strategies for sustainable development and inclusive
growth. Although various other factors have both direct and indirect connections to the economy, Table 2 outlines the proposed economic
indicators, which are vital measures for evaluating the performance of the economy (Işık et al., 2024a, 2024b; Jain and Singhal, 2023; Korkmaz
et al., 2022; Thomas Ng et al., 2000; Landefeld et al., 2008; Kosarev and Ponomarenko, 1996; Zarnowitz & Braun, 1989; Cain, 1979).

Table 2 Measuring Economic Indicators

Dimension Measuring Items
Gross domestic product
Interest rate
Economic Variables Consumer price index
Foreign exchange rate
Unemployment rate

Figure 1 Integrating economic dimension (ECON) into ESG factors as (ECON-ESG)

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Each of these economic variables/indicators is considered crucial for understanding various aspects of economic health. Gross Domestic
Product (GDP) is a comprehensive measure of a country's economic activity, reflecting overall growth and productivity. Interest rates influence
borrowing, saving, and investment decisions, impacting consumer spending and inflation rates. The Consumer Price Index (CPI) tracks changes
in the cost of living, providing insights into inflationary pressures. Foreign Exchange Rates affect international trade competitiveness and capital
flows, influencing export/import dynamics and inflation. The Unemployment Rate indicates labor market conditions and economic resilience,
reflecting the availability of jobs and consumer confidence. Monitoring these variables collectively provides a holistic view of economic
performance, aiding policymakers, businesses, and investors in decision-making and risk management.

5. Methodology

The methodology of the proposed composite ECON-ESG framework (see Figure 1) is constructed using individual economic (ECON),
environmental (E), social (S), governance (G), and ECON-ESG indices in the following procedural steps:
Principal Component Analysis: Principal Component Analysis (PCA) is a statistical method that identifies coherent subsets of variables in a
dataset by combining highly correlated variables into components. These components reveal underlying processes that explain the association
among the variables (Tabachnick et al., 2007). PCA aims to extract maximum variance from the dataset, with each component representing a
linear combination of observed variables that maximally separates subjects by maximizing the variance of their component scores. Subsequent
components are computed from residual correlations to extract maximum variability. The variability captured by subsequent components in
PCA is uncorrelated with the first component, ensuring independence. These subsequent components also extract maximum variability from
residual correlations and remain independent from each other. As a result, the extracted components represent a significant portion of the
variance in the original dataset and can be utilized in further analysis. Creating an ECON-ESG form principal component analysis can be an
appropriate method. We propose a new dimension that is vital to the country's sustainable development.
The PCA procedure in this study, shown in Figure 2 involves these key stages:

Figure 2 PCA Calculation Stage

• Evaluation: Evaluating variable relationships using the Kaiser-Meyer-Olkin (KMO) measure, with a threshold KMO statistic of 0.6, to proceed
with factor analysis (Kaiser and Rice, 1974). This measure assesses how well-suited the variables are for factor analysis by comparing the
sum of squared correlations to the sum of squared partial correlations.
• Determination: Determining the number of factors needed and their calculation through PCA. Factors are coefficients (loadings) that
measure correlations between individual indicators and latent factors. PCA forms linear combinations of fundamental indicators, with the
first principal component capturing the highest variance in the sample, followed by successive components explaining smaller portions of
variance and being uncorrelated with each other.
• Rotation: Rotating factors to simplify interpretation. Factor rotation is a standard step in factor analysis aimed at reducing indeterminacy
in results. The varimax method, employed here, minimizes the number of variables with high loadings on the same factor, thereby
approximating a "simple structure" where each indicator predominantly loads on one retained factor. This enhances factor interpretability.
• Weighting: Constructing weights for summary indicators based on factor loadings and their contribution to explained variance. Detailed
indicators are weighted according to the proportion of variance explained by associated factors (normalized squared loading). In contrast,
factors are weighted based on their contribution to the explained variance in the dataset (normalized sum of squared loadings).

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6. Conclusion

In conclusion, the integration of Environmental, Social, and Governance (ESG) factors has become integral to assessing countries' sustainable
development trajectories. However, traditional ESG frameworks often lack a direct link to economic fundamentals. Recognizing this gap, the
concept of "ECON-ESG" has been proposed, aiming to enhance sustainability assessment by incorporating economic indicators alongside
traditional ESG metrics.
While ESG analysis reports from various sources provide valuable insights, concerns remain regarding their reliability and uniformity.
Moreover, existing ESG indices primarily focus on evaluating policies rather than quantifying actual environmental and social impacts. This
paper proposes a comprehensive approach to ESG assessment, utilizing a wide range of environmental, social, and governance indicators.
Additionally, it introduces economic variables such as GDP, interest rates, and unemployment rates into the assessment framework. Principal
Component Analysis (PCA) is suggested as an appropriate method for creating the ECON-ESG form. This involves evaluating variable
relationships, determining the number of factors, rotating factors for interpretation, and weighting factors based on their contribution to
explained variance.
Incorporating economic indicators into ESG and making it ECON-ESG form provides a more holistic understanding of countries'
sustainability and development efforts. It enables policymakers, businesses, and investors to make informed decisions and devise efficient
strategies for sustainable growth and inclusive development.

6.1 Future Gap and Limitations

The difficulty of ensuring the reliability and consistency of ESG indicators in the process of integrating economic indicators into ESG is a
limitation of this proposed ECON-ESG form. Because this potential limitation may affect the accuracy of sustainability assessments. Therefore,
future research should focus on refining methodologies for ECON-ESG assessment and exploring alternative statistical techniques and data
sources to enhance accuracy and reliability. Additionally, efforts to standardize ESG indicators that will be used with high representative power
and standard reporting techniques are crucial for more accurate and comparable empirical results with other studies in the literature. Empirical
studies using long-time series are needed to understand the long-term impact of ECON-ESG on sustainability outcomes and economic
performance. At the same time, integration with emerging trends such as climate change and technological innovation should be prioritized to
ensure the framework remains relevant and effective in guiding decision-making. Because new technological developments such as AI are
coming into use rapidly and widely and are starting to change many things, from the economy to the environment and social life.

Conflicts of Interest: The authors declare no conflict of interest.

Compliance with ethical standards
Ethics approval and consent to participate: Not applicable.
Consent for publication: Not applicable
Funding: Not applicable

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Cem Işık (ORCID ID: 0000-0001-5125-7648) is a full professor of economics in the Faculty of Economics and
Administrative Sciences (FEAS) at Anadolu University. He is the founding/current Editor-in-Chief for Journal of
Ekonomi and Associate Editor for Environment, Development and Sustainability – Springer, Knowledge Economy
– Springer, Heliyon – Elsevier and Tourism Economics – Sage. His research interests include tourism,
environmental, energy, resources economics, innovation, ESG, sustainable development, and climate change. He
ranked in Stanford University of the World's Top 2% of Scientists – 2022 – 2023.

Serdar Ongan (ORCID ID: 0000-0001-9695-3188) Dr. Ongan earned his Ph.D. degree in 1999. He became
Associate Professor in Macroeconomics in 2005 and Full Professor in 2010 at Istanbul University. He has been
teaching different courses at the Department of Economics at the University of South Florida. Before this
university, he taught at the St. Mary’s College of Maryland between 2016-2021 and at the University of South
Florida between 2013-1016. He is a former Fulbright scholar at Michigan State University and the University of
Rhode Island. Dr. Ongan published many books and peer-reviewed papers.

Hasibul Islam (ORCID ID: 0000-0002-3242-2502) is a Lecturer at the Department of Business Administration
in Varendra University, Bangladesh, is currently investigating three topics: development economics,
environmental economics, and energy economics. His research interests include ESG and sustainability.
Previously, he held a position as a lecturer at NPI University of Bangladesh. Mr. Islam's academic journey is
characterized by exceptional achievements, such as being nominated for the Prime Minister's Gold Medal, which
will soon be awarded, underscoring his dedication and excellence in academia. Despite facing challenges in
accessing research opportunities, Mr. Islam has actively pursued and published research articles in reputable
journals, demonstrating his commitment to advancing knowledge in his field. Moreover, his establishment of the
Quantitative Research Center of Bangladesh illustrates his leadership and dedication to fostering collaboration
and supporting students in their research endeavors. Through this center, he aims to provide a platform for
students at all levels to engage in high-quality research and mutual learning opportunities, thus contributing to
the advancement of quantitative finance research in Bangladesh and beyond.

How to cite this article: Işık, C., Ongan, S., and Islam, H. (2024). A New pathway to sustainability: Integrating economic dimension (ECON) into
ESG factors as (ECON-ESG) and aligned with sustainable development goals (SDGs), Journal of Ekonomi, 6(1): 1–6. [Link]
ekonomi.1450860

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