ESG Performance and Its Impact on Mitigating Cost of Capital: Evidence from Southeast Asia
Abstract
In response to global challenges such as climate change, social injustice, and the growing demand for corporate ethics, Environmental, Social, and Governance (ESG) factors have become central to business, investment, and public policy agendas. This study aims to provide empirical evidence on the impact of ESG performance on the cost of capital. The research sample consists of non-financial companies listed on stock exchanges in developing Southeast Asian countries from 2018 to 2023. Using panel data regression analysis with STATA version 17, the findings reveal a significant positive relationship between overall ESG performance and the environmental pillar's impact on the cost of capital. However, the social and governance pillars do not show a significant effect on the cost of capital. Further analysis reveals that while ESG performance significantly reduces the cost of debt, it has no impact on the cost of equity. These results suggest that ESG-related practices are not yet fully valued by capital markets and stakeholders in developing Southeast Asian countries.
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References
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Delmas, M., Nairn-Birch, N., & Lim, J. (2015). Dynamics of Environmental and Financial Performance : The Case of Greenhouse Gas Emissions. https://doi.org/10.1177/1086026615620238
Dhaliwal, D., Li, O. Z., Tsang, A., & Yang, Y. G. (2014). Corporate social responsibility disclosure and the cost of equity capital: The roles of stakeholder orientation and financial transparency. Journal of Accounting and Public Policy, 33(4), 328–355. https://doi.org/10.1016/j.jaccpubpol.2014.04.006
DiMaggio, P. J., & Powell, W. W. (1983). The Iron Cage Revisited: Institutional Isomorphism in Organizational Fields. American Sociological Review, 48(2), 147–160.
Dowling, J., & Pfeffer, J. (1975). Organizational Legitimacy: Social Values and Organizational Behavior. Source: The Pacific Sociological Review, 18(1), 122–136.
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Eliwa, Y., Aboud, A., & Saleh, A. (2021). ESG practices and the cost of debt: Evidence from EU countries. Critical Perspectives on Accounting, 79(xxxx), 102097. https://doi.org/10.1016/j.cpa.2019.102097
Ellili, N. O. D. (2020). Environmental, social, and governance disclosure, ownership structure and cost of capital: Evidence from the UAE. Sustainability (Switzerland), 12(18). https://doi.org/10.3390/su12187706
Erragragui, E. (2018). Do creditors price firms ’ Environmental , Social and Governance risks ? Research in International Business and Finance. https://doi.org/10.1016/j.ribaf.2017.07.151
Gerab, H. C. F. (2017). Analysis of Sustainability Reports In Brazil Through The Lens of Signaling, Legitimacy and Stakeholder Theories. Social Responsibility Journal, 13(1), 1–18.
Gonçalves, T. C., Dias, J., & Barros, V. (2022). Sustainability Performance and the Cost of Capital. International Journal of Financial Studies, 10(3), 1–32. https://doi.org/10.3390/ijfs10030063
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Hutagaol-martowidjojo, Y., Tohang, V., & Emmanuella, P. T. (2023). The Moderating Role of Policy Intervention on the Relationship of Environment , Social , and Governance ( ESG ) and Cost of Equity Capital : A Study in Basic Materials Companies in Asia. 17(5), 4–14.
Hutchins, J., Sinha, M., Nandan, S., Hutchins, J., & Sinha, M. (2019). The sustainability route to corporate legitimacy The sustainability route to corporate legitimacy. Journal of Global Scholars of Marketing Science, 29(1), 15–24. https://doi.org/10.1080/21639159.2018.1551727
Khanchel, I., & Lassoued, N. (2022). ESG Disclosure and the Cost of Capital: Is There a Ratcheting Effect over Time? Sustainability (Switzerland), 14(15). https://doi.org/10.3390/su14159237
Lassoued, N., & Elmir, A. (2012). Portfolio selection: Does corporate governance matter? Corporate Governance (Bingley), 12(5), 701–713. https://doi.org/10.1108/14720701211275613
Li, M., Lan, F., & Zhang, F. (2019). Why Chinese Financial Market Investors Do Not Care about Corporate Social Responsibility : Evidence from Mergers and Acquisitions.
Li, S., & Liu, C. (2018). Quality of Corporate Social Responsibility Disclosure and Cost of Equity Capital: Lessons from China. Emerging Markets Finance and Trade, 54(11), 2472–2494. https://doi.org/10.1080/1540496X.2018.1443441
LSEG. (2022). Environmental, social and governance scores from LSEG Environmental, social and governance scores from LSEG 2. 2–33. https://www.lseg.com/en/data-analytics/sustainable-finance/esg-scores#:~:text=ESG scores from LSEG are,based on publicly-reported data.
Magnanelli, B. S., & Izzo, M. F. (2017). Corporate social performance and cost of debt: The relationship. Social Responsibility Journal, 13(2), 250–265. https://doi.org/10.1108/SRJ-06-2016-0103
Megumi Suto, H. T. (2017). Article information : About Emerald www.emeraldinsight.com CSR and cost of capital : evidence from Japan. https://doi.org/https:// doi.org/10.1108/SRJ-10-2016-0170
Michaels, A., & Grüning, M. (2017). Relationship of corporate social responsibility disclosure on information asymmetry and the cost of capital. Journal of Management Control, 28(3), 251–274. https://doi.org/10.1007/s00187-017-0251-z
Muneer, M., Afifa, A., Saleh, I., & Al-zaghilat, M. (2023). Does CSR disclosure mediate the board characteristics-cost of equity capital nexus ? Evidence from Jordanian services companies. https://doi.org/10.1108/JFRA-03-2023-0143
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Page, O., & Indriana, I. (2022). Maintaining Legitimacy : The Environmental Management Practices and Green Innovation on Indonesian Manufacturing Companies. Journal of Applied Business , Taxation and Economics Research ( JABTER ), 2(1), 83–99. https://doi.org/10.54408/jabter.v2i1.130
Pan, F. (2021). ESG Disclosure and Performance in Southeast Asia. Sustainalytics. https://www.sustainalytics.com/esg-research/resource/investors-esg-blog/esg-disclosure-and-performance-in-southeast-asia
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Pratt, S. P., & Grabowski, R. J. (2014). Cost of Capital: Applications and Examples (5th ed). John Wiley & Sons, Inc. https://doi.org/10.1002/9781118846780
Raimo, N., de Nuccio, E., Giakoumelou, A., Petruzzella, F., & Vitolla, F. (2021). Non-financial information and cost of equity capital: an empirical analysis in the food and beverage industry. British Food Journal, 123(1), 49–65. https://doi.org/10.1108/BFJ-03-2020-0278
Rao, S. (2023). The Relationship Between ESG Rating and the Cost of Equity Capital: Evidence from China. BCP Business & Management, 38, 325–334. https://doi.org/10.54691/bcpbm.v38i.3711
Ross, S. A. (1977). Informational Asymmetries, Financial Structure, and Financial Intermediation: Discussion. The Journal of Finance, 32(2), 412. https://doi.org/10.2307/2326773
Saleh, M. W. A., & Maigoshi, Z. S. (2024). The nexus of ESG and environmental sustainability: Does gender diversity make a difference in Asian companies? Environment, Development and Sustainability. https://doi.org/10.1007/s10668-024-04498-5
Sharfman, M. p., & S. Fernando, C. (2010). The Effect of Firm Compensation Structures on the Mobility and Entrepreneurship of Extreme Performers. Business, 920(October), 1–43. https://doi.org/10.1002/smj
Spence, M. (1973). Job Market Signaling. Oxford Journal, 87(3), 355–374.
Thomson.Reuters. (2024). Asset 4 ESG Data Glossary. DataStreams. https://apac1-apps.platform.refinitiv.com/web/apps/screenerapp
Umar, R., Hashfi, A., Islam, U., Sunan, N., & Mada, U. G. (2022). Does Doing Good Diminish Cost of Capital? Evidence From South-East Asia Markets. 1(2), 144–153.
Yilmaz, I. (2022). ESG-Based Sustainability Performance and its Impact on Cost of Capital: International Evidence from the Energy Sector. International Journal of Applied Economics, Finance and Accounting, 12(2), 21–30. https://doi.org/10.33094/ijaefa.v12i2.529
Atan, R., Alam, M. M., Said, J., & Zamri, M. (2018). The impacts of environmental, social, and governance factors on firm performance. Management of Environmental Quality: An International Journal, 29(2), 182–194. https://doi.org/10.1108/meq-03-2017-0033
Bozoklu, C. P. (2018). The Effects of Social Responsibility Activities on Stakeholders ’ Purchase Intention. 9(4), 889–900. https://doi.org/10.20409/berj.2018.145
Broadstock, D. C., Chan, K., Cheng, L. T. W., & Wang, X. (2021). The role of ESG performance during times of financial crisis: Evidence from COVID-19 in China. Finance Research Letters, 38, 101716. https://doi.org/10.1016/j.frl.2020.101716
Buallay, A. (2019). Is sustainability reporting (ESG) associated with performance? Evidence from the European banking sector. Management of Environmental Quality: An International Journal, 30(1), 98–115. https://doi.org/10.1108/MEQ-12-2017-0149
Burlea-schiopoiu, A. (2013). Encyclopedia of Corporate Social Responsibility. Encyclopedia of Corporate Social Responsibility, January 2013. https://doi.org/10.1007/978-3-642-28036-8
Chen, Y., Li, T., Zeng, Q., & Zhu, B. (2023). Effect of ESG performance on the cost of equity capital: Evidence from China. International Review of Economics and Finance, 83(May 2022), 348–364. https://doi.org/10.1016/j.iref.2022.09.001
Daddi, T., Testa, F., Tessitore, S., & Iraldo, F. (2022). Environmental performance improvements and external stakeholder pressures in companies with certified Environmental Management System. 8, 76–83. https://doi.org/10.46300/91018.2021.8.10
Deegan, C., & Unerman, J. (2011). Financial Accounting Theory (2nd ed.). McGraw-Hill.
Delmas, M., Nairn-Birch, N., & Lim, J. (2015). Dynamics of Environmental and Financial Performance : The Case of Greenhouse Gas Emissions. https://doi.org/10.1177/1086026615620238
Dhaliwal, D., Li, O. Z., Tsang, A., & Yang, Y. G. (2014). Corporate social responsibility disclosure and the cost of equity capital: The roles of stakeholder orientation and financial transparency. Journal of Accounting and Public Policy, 33(4), 328–355. https://doi.org/10.1016/j.jaccpubpol.2014.04.006
DiMaggio, P. J., & Powell, W. W. (1983). The Iron Cage Revisited: Institutional Isomorphism in Organizational Fields. American Sociological Review, 48(2), 147–160.
Dowling, J., & Pfeffer, J. (1975). Organizational Legitimacy: Social Values and Organizational Behavior. Source: The Pacific Sociological Review, 18(1), 122–136.
Dua, J., & Sharma, A. K. (2024). Corporate Sustainability and Capital Costs: A Panel Evidence from BRICS Countries. Indian Journal of Corporate Governance, 17(1). https://doi.org/https://doi.org/10.1177/09746862241240368
Dye, R. A. (1985). Disclosure of Nonproprietary Information. 23(1), 123–145.
El Ghoul, S., Guedhami, O., Kwok, C. C. Y., & Mishra, D. R. (2011). Does corporate social responsibility affect the cost of capital? Journal of Banking and Finance, 35(9), 2388–2406. https://doi.org/10.1016/j.jbankfin.2011.02.007
Eliwa, Y., Aboud, A., & Saleh, A. (2021). ESG practices and the cost of debt: Evidence from EU countries. Critical Perspectives on Accounting, 79(xxxx), 102097. https://doi.org/10.1016/j.cpa.2019.102097
Ellili, N. O. D. (2020). Environmental, social, and governance disclosure, ownership structure and cost of capital: Evidence from the UAE. Sustainability (Switzerland), 12(18). https://doi.org/10.3390/su12187706
Erragragui, E. (2018). Do creditors price firms ’ Environmental , Social and Governance risks ? Research in International Business and Finance. https://doi.org/10.1016/j.ribaf.2017.07.151
Gerab, H. C. F. (2017). Analysis of Sustainability Reports In Brazil Through The Lens of Signaling, Legitimacy and Stakeholder Theories. Social Responsibility Journal, 13(1), 1–18.
Gonçalves, T. C., Dias, J., & Barros, V. (2022). Sustainability Performance and the Cost of Capital. International Journal of Financial Studies, 10(3), 1–32. https://doi.org/10.3390/ijfs10030063
Harrington, J. P., Nunes, C., Aboulamer, A., & Grabowski, R. J. (2021). Valuation Handbook — International Guide to Cost of Capital. In CFA Institute Research Foundation. Duff & Phelps, A Kroll Business. https://doi.org/10.2139/ssrn.3958962
Hutagaol-martowidjojo, Y., Tohang, V., & Emmanuella, P. T. (2023). The Moderating Role of Policy Intervention on the Relationship of Environment , Social , and Governance ( ESG ) and Cost of Equity Capital : A Study in Basic Materials Companies in Asia. 17(5), 4–14.
Hutchins, J., Sinha, M., Nandan, S., Hutchins, J., & Sinha, M. (2019). The sustainability route to corporate legitimacy The sustainability route to corporate legitimacy. Journal of Global Scholars of Marketing Science, 29(1), 15–24. https://doi.org/10.1080/21639159.2018.1551727
Khanchel, I., & Lassoued, N. (2022). ESG Disclosure and the Cost of Capital: Is There a Ratcheting Effect over Time? Sustainability (Switzerland), 14(15). https://doi.org/10.3390/su14159237
Lassoued, N., & Elmir, A. (2012). Portfolio selection: Does corporate governance matter? Corporate Governance (Bingley), 12(5), 701–713. https://doi.org/10.1108/14720701211275613
Li, M., Lan, F., & Zhang, F. (2019). Why Chinese Financial Market Investors Do Not Care about Corporate Social Responsibility : Evidence from Mergers and Acquisitions.
Li, S., & Liu, C. (2018). Quality of Corporate Social Responsibility Disclosure and Cost of Equity Capital: Lessons from China. Emerging Markets Finance and Trade, 54(11), 2472–2494. https://doi.org/10.1080/1540496X.2018.1443441
LSEG. (2022). Environmental, social and governance scores from LSEG Environmental, social and governance scores from LSEG 2. 2–33. https://www.lseg.com/en/data-analytics/sustainable-finance/esg-scores#:~:text=ESG scores from LSEG are,based on publicly-reported data.
Magnanelli, B. S., & Izzo, M. F. (2017). Corporate social performance and cost of debt: The relationship. Social Responsibility Journal, 13(2), 250–265. https://doi.org/10.1108/SRJ-06-2016-0103
Megumi Suto, H. T. (2017). Article information : About Emerald www.emeraldinsight.com CSR and cost of capital : evidence from Japan. https://doi.org/https:// doi.org/10.1108/SRJ-10-2016-0170
Michaels, A., & Grüning, M. (2017). Relationship of corporate social responsibility disclosure on information asymmetry and the cost of capital. Journal of Management Control, 28(3), 251–274. https://doi.org/10.1007/s00187-017-0251-z
Muneer, M., Afifa, A., Saleh, I., & Al-zaghilat, M. (2023). Does CSR disclosure mediate the board characteristics-cost of equity capital nexus ? Evidence from Jordanian services companies. https://doi.org/10.1108/JFRA-03-2023-0143
Oxford University, & GlobeScan. (2021). Oxford-GlobeScan Global Corporate Affairs Survey 2021 Survey Report.
Page, O., & Indriana, I. (2022). Maintaining Legitimacy : The Environmental Management Practices and Green Innovation on Indonesian Manufacturing Companies. Journal of Applied Business , Taxation and Economics Research ( JABTER ), 2(1), 83–99. https://doi.org/10.54408/jabter.v2i1.130
Pan, F. (2021). ESG Disclosure and Performance in Southeast Asia. Sustainalytics. https://www.sustainalytics.com/esg-research/resource/investors-esg-blog/esg-disclosure-and-performance-in-southeast-asia
Patten, D. M. (1992). Intra-industry environmental disclosures in response to the Alaskan oil spill: A note on legitimacy theory. Accounting, Organizations and Society, 17(5), 471–475. https://doi.org/10.1016/0361-3682(92)90042-Q
Pratt, S. P., & Grabowski, R. J. (2014). Cost of Capital: Applications and Examples (5th ed). John Wiley & Sons, Inc. https://doi.org/10.1002/9781118846780
Raimo, N., de Nuccio, E., Giakoumelou, A., Petruzzella, F., & Vitolla, F. (2021). Non-financial information and cost of equity capital: an empirical analysis in the food and beverage industry. British Food Journal, 123(1), 49–65. https://doi.org/10.1108/BFJ-03-2020-0278
Rao, S. (2023). The Relationship Between ESG Rating and the Cost of Equity Capital: Evidence from China. BCP Business & Management, 38, 325–334. https://doi.org/10.54691/bcpbm.v38i.3711
Ross, S. A. (1977). Informational Asymmetries, Financial Structure, and Financial Intermediation: Discussion. The Journal of Finance, 32(2), 412. https://doi.org/10.2307/2326773
Saleh, M. W. A., & Maigoshi, Z. S. (2024). The nexus of ESG and environmental sustainability: Does gender diversity make a difference in Asian companies? Environment, Development and Sustainability. https://doi.org/10.1007/s10668-024-04498-5
Sharfman, M. p., & S. Fernando, C. (2010). The Effect of Firm Compensation Structures on the Mobility and Entrepreneurship of Extreme Performers. Business, 920(October), 1–43. https://doi.org/10.1002/smj
Spence, M. (1973). Job Market Signaling. Oxford Journal, 87(3), 355–374.
Thomson.Reuters. (2024). Asset 4 ESG Data Glossary. DataStreams. https://apac1-apps.platform.refinitiv.com/web/apps/screenerapp
Umar, R., Hashfi, A., Islam, U., Sunan, N., & Mada, U. G. (2022). Does Doing Good Diminish Cost of Capital? Evidence From South-East Asia Markets. 1(2), 144–153.
Yilmaz, I. (2022). ESG-Based Sustainability Performance and its Impact on Cost of Capital: International Evidence from the Energy Sector. International Journal of Applied Economics, Finance and Accounting, 12(2), 21–30. https://doi.org/10.33094/ijaefa.v12i2.529
Published
2024-10-11
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SAPUTRA, Anggi; RAHMAN, Annisaa .
ESG Performance and Its Impact on Mitigating Cost of Capital: Evidence from Southeast Asia.
E-Jurnal Akuntansi, [S.l.], v. 34, n. 8, oct. 2024.
ISSN 2302-8556.
Available at: <https://ojs.unud.ac.id/index.php/akuntansi/article/view/116855>. Date accessed: 23 nov. 2024.
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