Economic complexity and energy vulnerability: Does ESG performance matter?

Energy vulnerability is a critical concern for achieving energy security and meeting the SDGs. However, the role of economic complexity, which represents a country's production and export diversification, in energy vulnerability has been largely neglected in the literature. This study fills this gap by examining the impact of economic complexity on energy vulnerability for 69 developing countries over the period 2000-2019. For this purpose, MMQR and various instrumental variable (IV) estimation techniques (IV-Quantile, 2SLS, Lewbel, and Kiviet) were used. In addition, ESG indicators were included in the model as instrumental variables to address potential endogeneity issues between economic complexity and energy vulnerability. In doing so, the ESG indicators are also included in the model as instrumental variables to control for the endogeneity of economic complexity. Empirical findings show that economic complexity is associated with lower energy vulnerability across all quantiles. These results reveal that countries with diversified economic structures (higher economic complexity) may be more resilient to energy shocks. Therefore, developing countries should focus on structural reforms and improve their ESG performances to reduce energy vulnerability. In terms of control variables, financial development, digitalization, and human capital are associated with lower energy vulnerability, whereas increases in natural resource revenues are sometimes associated with lower vulnerability levels. This finding suggests that, in the context of energy vulnerability, the predictions of the resource curse theory may not be observed in every case.