ENVIRONMENTAL, SOCIAL AND GOVERNANCE PERFORMANCE AND COST OF DEBT: DOES THE BOARD OF COMMISSIONERS' CHARACTERISTICS PLAY A ROLE?
Abstract
This study aims to obtain evidence of the influence of ESG performance on the cost of debt and the role of the independent committee in this relationship. The sample used consists of non-financial companies listed on the Indonesia Stock Exchange from 2011 to 2019. The final sample comprises 205 company-year observations. Data were processed using the Generalized Least Squares (GLS) method through STATA 16.0 software. The results of this study indicate that higher ESG performance leads to lower cost of debt. This suggests that creditors view ESG performance as an important practice to be implemented in a company. The study also documents findings that the independent committee does not play a moderating role in the relationship between ESG performance and the cost of debt.
References
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Ali, W., Danni, Y., Latif, B., Kouser, R., & Baqader, S. (2021). Corporate social responsibility and customer loyalty in food chains—mediating role of customer satisfaction and corporate reputation. Sustainability (Switzerland), 13(16). https://doi.org/10.3390/su13168681
Arif, M., Sajjad, A., Farooq, S., Abrar, M., & Joyo, A. S. (2020). The impact of audit committee attributes on the quality and quantity of environmental, social and governance (ESG) disclosures. Corporate Governance (Bingley), 21(3), 497–514. https://doi.org/10.1108/CG-06-2020-0243
Arora, A., & Sharma, D. (n.d.). Do Environmental, Social and Governance (ESG) Performance Scores Reduce the Cost of Debt? Evidence from Indian firms.
Ben Slimane, M., Le Guenedal, T., Roncalli, T., & Sekine, T. (2020). ESG Investing in Corporate Bonds: Mind the Gap. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.3683472
Bhattacharya, S., & Sharma, D. (2019). Do environment, social and governance performance impact credit ratings: a study from India. International Journal of Ethics and Systems, 35(3), 466–484. https://doi.org/10.1108/IJOES-09-2018-0130
Bofinger, Y., Heyden, K. J., & Rock, B. (2022). Corporate social responsibility and market efficiency: Evidence from ESG and misvaluation measures. Journal of Banking and Finance, 134. https://doi.org/10.1016/j.jbankfin.2021.106322
Bravo, F., & Reguera-Alvarado, N. (2019). Sustainable development disclosure: Environmental, social, and governance reporting and gender diversity in the audit committee. Business Strategy and the Environment, 28(2), 418–429. https://doi.org/10.1002/bse.2258
Buallay, A., & Al-Ajmi, J. (2020). The role of audit committee attributes in corporate sustainability reporting: Evidence from banks in the Gulf Cooperation Council. Journal of Applied Accounting Research, 21(2), 249–264. https://doi.org/10.1108/JAAR-06-2018-0085
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, 348–364. https://doi.org/10.1016/j.iref.2022.09.001
Deegan, C. (2014). An overview of legitimacy theory as applied within the social and environmental accounting literature. Sustainability accounting and accountability, 248-272
Dwekat, A., Seguí-Mas, E., Tormo-Carbó, G., & Carmona, P. (2020). Corporate Governance Configurations and Corporate Social Responsibility Disclosure: Qualitative Comparative Analysis of Audit Committee and Board characteristics. Corporate Social Responsibility and Environmental Management, 27(6), 2879–2892. https://doi.org/10.1002/csr.2009
Eliwa, Y., Aboud, A., & Saleh, A. (2021). ESG practices and the cost of debt: Evidence from EU countries. Critical Perspectives on Accounting, 79. https://doi.org/10.1016/j.cpa.2019.102097
Elmghaamez, I. K., Nwachukwu, J., & Ntim, C. G. (2023). ESG disclosure and financial performance of multinational enterprises: The moderating effect of board standing committees. International Journal of Finance and Economics. https://doi.org/10.1002/ijfe.2846
Fonseka, M., Rajapakse, T., & Richardson, G. (2019). The effect of environmental information disclosure and energy product type on the cost of debt: Evidence from energy firms in China. Pacific Basin Finance Journal, 54, 159–182. https://doi.org/10.1016/j.pacfin.2018.05.001
Galant, A., & Cadez, S. (2017). Corporate social responsibility and financial performance relationship: A review of measurement approaches. Economic Research-Ekonomska Istrazivanja , 30(1), 676–693. https://doi.org/10.1080/1331677X.2017.1313122
Garas, S., & ElMassah, S. (2018). Corporate governance and corporate social responsibility disclosures: The case of GCC countries. Critical Perspectives on International Business, 14(1), 2–26. https://doi.org/10.1108/cpoib-10-2016-0042
Garzón Jiménez, R., & Zorio-Grima, A. (2021). Sustainability engagement in Latin America firms and cost of equity. Academia Revista Latinoamericana de Administracion, 34(2), 224–243. https://doi.org/10.1108/ARLA-05-2020-0117
Gillan, S. L., Koch, A., & Starks, L. T. (2021). Firms and social responsibility: A review of ESG and CSR research in corporate finance. Journal of Corporate Finance, 66. https://doi.org/10.1016/j.jcorpfin.2021.101889
Gonçalves, T. C., Dias, J., & Barros, V. (2022). Sustainability Performance and the Cost of Capital. International Journal of Financial Studies, 10(3). https://doi.org/10.3390/ijfs10030063
Gracia, O., & Siregar, S. V. (2021). Sustainability practices and the cost of debt: Evidence from ASEAN countries. Journal of Cleaner Production, 300. https://doi.org/10.1016/j.jclepro.2021.126942
Gupta, K. (2018). Environmental Sustainability and Implied Cost of Equity: International Evidence. Source: Journal of Business Ethics, 147(2), 343–365. https://doi.org/10.1007/sl0551-015-2971-z
Hu, J., Li, S., Taboada, A. G., & Zhang, F. (2020). Corporate board reforms around the world and stock price crash risk. Journal of Corporate Finance, 62. https://doi.org/10.1016/j.jcorpfin.2020.101557
Jain, R., Bhatia, A. D., & Arekar, K. (2021). Structural Equation Modelling to Understand the Impact of Various Components of CSR and the Benefits to Stakeholders. Vision. https://doi.org/10.1177/09722629211050317
Jensen, M.C., Meckling, W.H., 1976. Theory of the firm: managerial behavior, agency costs and ownership structure. J. Financ. Econ. 3, 305e360. https://doi.org/10.1016/0304-405X(76)90026-X
Li, Y., Chen, R., & Xiang, E. (2022). Corporate social responsibility, green financial system guidelines, and cost of debt financing: Evidence from pollution-intensive industries in China. Corporate Social Responsibility and Environmental Management, 29(3), 593–608. https://doi.org/10.1002/csr.2222
Lin, W. L., Law, S. H., Ho, J. A., & Sambasivan, M. (2019). The causality direction of the corporate social responsibility – Corporate financial performance Nexus: Application of Panel Vector Autoregression approach. North American Journal of Economics and Finance, 48, 401–418. https://doi.org/10.1016/j.najef.2019.03.004
Manes-Rossi, F., Nicolò, G., & Argento, D. (2020). Non-financial reporting formats in public sector organizations: a structured literature review. Journal of Public Budgeting, Accounting and Financial Management, 32(4), 639–669. https://doi.org/10.1108/JPBAFM-03-2020-0037
Mio, C., Fasan, M., & Scarpa, F. (2023). Materiality investor perspectives on utilities’ ESG performance. An empirical analysis of ESG factors and cost of equity. Utilities Policy, 82. https://doi.org/10.1016/j.jup.2023.101555
Muchemwa, M. R., Padia, N., & Callaghan, C. W. (2016). Board composition, board size and financial performance of johannesburg stock exchange companies. South African Journal of Economic and Management Sciences, 19(4), 497–513. https://doi.org/10.17159/2222-3436/2016/v19n4a3
Ng, A. C., & Rezaee, Z. (2015). Business sustainability performance and cost of equity capital. Journal of Corporate Finance, 34, 128–149. https://doi.org/10.1016/j.jcorpfin.2015.08.003
Ntim, C. G. (2015). Board diversity and organizational valuation: unravelling the effects of ethnicity and gender. Journal of Management and Governance, 19(1), 167–195. https://doi.org/10.1007/s10997-013-9283-4
Ok, Y., & Kim, J. (2019). Which corporate social responsibility performance affects the cost of equity? Evidence from Korea. Sustainability (Switzerland), 11(10). https://doi.org/10.3390/su11102947
Onkila, T., & Sarna, B. (2022). A systematic literature review on employee relations with CSR: State of art and future research agenda. In Corporate Social Responsibility and Environmental Management (Vol. 29, Issue 2, pp. 435–447). John Wiley and Sons Ltd. https://doi.org/10.1002/csr.2210
Raimo, N., Rella, A., Vitolla, F., Sánchez-Vicente, M. I., & García-Sánchez, I. M. (2021). Corporate social responsibility in the covid-19 pandemic period: A traditional way to address new social issues. Sustainability (Switzerland), 13(12). https://doi.org/10.3390/su13126561
Raimo, N., Vitolla, F., Marrone, A., & Rubino, M. (2021). Do audit committee attributes influence integrated reporting quality? An agency theory viewpoint. Business Strategy and the Environment, 30(1), 522–534. https://doi.org/10.1002/bse.2635
Sengupta, P. (1998). Corporate Disclosure Quality and the Cost of Debt. In Source: The Accounting Review (Vol. 73, Issue 4).
Shad, M. K., Lai, F. W., Shamim, A., & McShane, M. (2020). The efficacy of sustainability reporting towards cost of debt and equity reduction. Environmental Science and Pollution Research, 27(18), 22511–22522. https://doi.org/10.1007/s11356-020-08398-9
Shahab, Y., Ntim, C. G., Chengang, Y., Ullah, F., & Fosu, S. (2018). Environmental policy, environmental performance, and financial distress in China: Do top management team characteristics matter? Business Strategy and the Environment, 27(8), 1635–1652. https://doi.org/10.1002/bse.2229
Sugiyanto, E., Trisnawati, R., & Kusumawati, E. (2021). Corporate Social Responsibility and Firm Value with Profitability, Firm Size, Managerial Ownership, and Board of Size, Managerial Ownership, and Board of Commissioners as Moderating Variables. Riset Akuntansi Dan Keuangan Indonesia, 6(1), 22–30. http://journals.ums.ac.id/index.php/reaksi/index
Trisnawati, R., Dwi Wardati, S., & Putri, E. (2022). The Influence of Majority Ownership, Profitability, Size of the Board of Directors, and Frequency of Board of Commissioners Meetings on Sustainability Report. Riset Akuntansi Dan Keuangan Indonesia, 7(1), 94–104. http://journals.ums.ac.id/index.php/reaksi/index
Alhossini, M. A., Ntim, C. G., & Zalata, A. M. (2021). Corporate Board Committees and Corporate Outcomes: An International Systematic Literature Review and Agenda for Future Research. International Journal of Accounting. https://doi.org/10.1142/S1094406021500013
Ali, W., Danni, Y., Latif, B., Kouser, R., & Baqader, S. (2021). Corporate social responsibility and customer loyalty in food chains—mediating role of customer satisfaction and corporate reputation. Sustainability (Switzerland), 13(16). https://doi.org/10.3390/su13168681
Arif, M., Sajjad, A., Farooq, S., Abrar, M., & Joyo, A. S. (2020). The impact of audit committee attributes on the quality and quantity of environmental, social and governance (ESG) disclosures. Corporate Governance (Bingley), 21(3), 497–514. https://doi.org/10.1108/CG-06-2020-0243
Arora, A., & Sharma, D. (n.d.). Do Environmental, Social and Governance (ESG) Performance Scores Reduce the Cost of Debt? Evidence from Indian firms.
Ben Slimane, M., Le Guenedal, T., Roncalli, T., & Sekine, T. (2020). ESG Investing in Corporate Bonds: Mind the Gap. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.3683472
Bhattacharya, S., & Sharma, D. (2019). Do environment, social and governance performance impact credit ratings: a study from India. International Journal of Ethics and Systems, 35(3), 466–484. https://doi.org/10.1108/IJOES-09-2018-0130
Bofinger, Y., Heyden, K. J., & Rock, B. (2022). Corporate social responsibility and market efficiency: Evidence from ESG and misvaluation measures. Journal of Banking and Finance, 134. https://doi.org/10.1016/j.jbankfin.2021.106322
Bravo, F., & Reguera-Alvarado, N. (2019). Sustainable development disclosure: Environmental, social, and governance reporting and gender diversity in the audit committee. Business Strategy and the Environment, 28(2), 418–429. https://doi.org/10.1002/bse.2258
Buallay, A., & Al-Ajmi, J. (2020). The role of audit committee attributes in corporate sustainability reporting: Evidence from banks in the Gulf Cooperation Council. Journal of Applied Accounting Research, 21(2), 249–264. https://doi.org/10.1108/JAAR-06-2018-0085
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, 348–364. https://doi.org/10.1016/j.iref.2022.09.001
Deegan, C. (2014). An overview of legitimacy theory as applied within the social and environmental accounting literature. Sustainability accounting and accountability, 248-272
Dwekat, A., Seguí-Mas, E., Tormo-Carbó, G., & Carmona, P. (2020). Corporate Governance Configurations and Corporate Social Responsibility Disclosure: Qualitative Comparative Analysis of Audit Committee and Board characteristics. Corporate Social Responsibility and Environmental Management, 27(6), 2879–2892. https://doi.org/10.1002/csr.2009
Eliwa, Y., Aboud, A., & Saleh, A. (2021). ESG practices and the cost of debt: Evidence from EU countries. Critical Perspectives on Accounting, 79. https://doi.org/10.1016/j.cpa.2019.102097
Elmghaamez, I. K., Nwachukwu, J., & Ntim, C. G. (2023). ESG disclosure and financial performance of multinational enterprises: The moderating effect of board standing committees. International Journal of Finance and Economics. https://doi.org/10.1002/ijfe.2846
Fonseka, M., Rajapakse, T., & Richardson, G. (2019). The effect of environmental information disclosure and energy product type on the cost of debt: Evidence from energy firms in China. Pacific Basin Finance Journal, 54, 159–182. https://doi.org/10.1016/j.pacfin.2018.05.001
Galant, A., & Cadez, S. (2017). Corporate social responsibility and financial performance relationship: A review of measurement approaches. Economic Research-Ekonomska Istrazivanja , 30(1), 676–693. https://doi.org/10.1080/1331677X.2017.1313122
Garas, S., & ElMassah, S. (2018). Corporate governance and corporate social responsibility disclosures: The case of GCC countries. Critical Perspectives on International Business, 14(1), 2–26. https://doi.org/10.1108/cpoib-10-2016-0042
Garzón Jiménez, R., & Zorio-Grima, A. (2021). Sustainability engagement in Latin America firms and cost of equity. Academia Revista Latinoamericana de Administracion, 34(2), 224–243. https://doi.org/10.1108/ARLA-05-2020-0117
Gillan, S. L., Koch, A., & Starks, L. T. (2021). Firms and social responsibility: A review of ESG and CSR research in corporate finance. Journal of Corporate Finance, 66. https://doi.org/10.1016/j.jcorpfin.2021.101889
Gonçalves, T. C., Dias, J., & Barros, V. (2022). Sustainability Performance and the Cost of Capital. International Journal of Financial Studies, 10(3). https://doi.org/10.3390/ijfs10030063
Gracia, O., & Siregar, S. V. (2021). Sustainability practices and the cost of debt: Evidence from ASEAN countries. Journal of Cleaner Production, 300. https://doi.org/10.1016/j.jclepro.2021.126942
Gupta, K. (2018). Environmental Sustainability and Implied Cost of Equity: International Evidence. Source: Journal of Business Ethics, 147(2), 343–365. https://doi.org/10.1007/sl0551-015-2971-z
Hu, J., Li, S., Taboada, A. G., & Zhang, F. (2020). Corporate board reforms around the world and stock price crash risk. Journal of Corporate Finance, 62. https://doi.org/10.1016/j.jcorpfin.2020.101557
Jain, R., Bhatia, A. D., & Arekar, K. (2021). Structural Equation Modelling to Understand the Impact of Various Components of CSR and the Benefits to Stakeholders. Vision. https://doi.org/10.1177/09722629211050317
Jensen, M.C., Meckling, W.H., 1976. Theory of the firm: managerial behavior, agency costs and ownership structure. J. Financ. Econ. 3, 305e360. https://doi.org/10.1016/0304-405X(76)90026-X
Li, Y., Chen, R., & Xiang, E. (2022). Corporate social responsibility, green financial system guidelines, and cost of debt financing: Evidence from pollution-intensive industries in China. Corporate Social Responsibility and Environmental Management, 29(3), 593–608. https://doi.org/10.1002/csr.2222
Lin, W. L., Law, S. H., Ho, J. A., & Sambasivan, M. (2019). The causality direction of the corporate social responsibility – Corporate financial performance Nexus: Application of Panel Vector Autoregression approach. North American Journal of Economics and Finance, 48, 401–418. https://doi.org/10.1016/j.najef.2019.03.004
Manes-Rossi, F., Nicolò, G., & Argento, D. (2020). Non-financial reporting formats in public sector organizations: a structured literature review. Journal of Public Budgeting, Accounting and Financial Management, 32(4), 639–669. https://doi.org/10.1108/JPBAFM-03-2020-0037
Mio, C., Fasan, M., & Scarpa, F. (2023). Materiality investor perspectives on utilities’ ESG performance. An empirical analysis of ESG factors and cost of equity. Utilities Policy, 82. https://doi.org/10.1016/j.jup.2023.101555
Muchemwa, M. R., Padia, N., & Callaghan, C. W. (2016). Board composition, board size and financial performance of johannesburg stock exchange companies. South African Journal of Economic and Management Sciences, 19(4), 497–513. https://doi.org/10.17159/2222-3436/2016/v19n4a3
Ng, A. C., & Rezaee, Z. (2015). Business sustainability performance and cost of equity capital. Journal of Corporate Finance, 34, 128–149. https://doi.org/10.1016/j.jcorpfin.2015.08.003
Ntim, C. G. (2015). Board diversity and organizational valuation: unravelling the effects of ethnicity and gender. Journal of Management and Governance, 19(1), 167–195. https://doi.org/10.1007/s10997-013-9283-4
Ok, Y., & Kim, J. (2019). Which corporate social responsibility performance affects the cost of equity? Evidence from Korea. Sustainability (Switzerland), 11(10). https://doi.org/10.3390/su11102947
Onkila, T., & Sarna, B. (2022). A systematic literature review on employee relations with CSR: State of art and future research agenda. In Corporate Social Responsibility and Environmental Management (Vol. 29, Issue 2, pp. 435–447). John Wiley and Sons Ltd. https://doi.org/10.1002/csr.2210
Raimo, N., Rella, A., Vitolla, F., Sánchez-Vicente, M. I., & García-Sánchez, I. M. (2021). Corporate social responsibility in the covid-19 pandemic period: A traditional way to address new social issues. Sustainability (Switzerland), 13(12). https://doi.org/10.3390/su13126561
Raimo, N., Vitolla, F., Marrone, A., & Rubino, M. (2021). Do audit committee attributes influence integrated reporting quality? An agency theory viewpoint. Business Strategy and the Environment, 30(1), 522–534. https://doi.org/10.1002/bse.2635
Sengupta, P. (1998). Corporate Disclosure Quality and the Cost of Debt. In Source: The Accounting Review (Vol. 73, Issue 4).
Shad, M. K., Lai, F. W., Shamim, A., & McShane, M. (2020). The efficacy of sustainability reporting towards cost of debt and equity reduction. Environmental Science and Pollution Research, 27(18), 22511–22522. https://doi.org/10.1007/s11356-020-08398-9
Shahab, Y., Ntim, C. G., Chengang, Y., Ullah, F., & Fosu, S. (2018). Environmental policy, environmental performance, and financial distress in China: Do top management team characteristics matter? Business Strategy and the Environment, 27(8), 1635–1652. https://doi.org/10.1002/bse.2229
Sugiyanto, E., Trisnawati, R., & Kusumawati, E. (2021). Corporate Social Responsibility and Firm Value with Profitability, Firm Size, Managerial Ownership, and Board of Size, Managerial Ownership, and Board of Commissioners as Moderating Variables. Riset Akuntansi Dan Keuangan Indonesia, 6(1), 22–30. http://journals.ums.ac.id/index.php/reaksi/index
Trisnawati, R., Dwi Wardati, S., & Putri, E. (2022). The Influence of Majority Ownership, Profitability, Size of the Board of Directors, and Frequency of Board of Commissioners Meetings on Sustainability Report. Riset Akuntansi Dan Keuangan Indonesia, 7(1), 94–104. http://journals.ums.ac.id/index.php/reaksi/index
Published
2023-12-25
How to Cite
PUSPARINI, Nandya Octanti; AMANATI, Hilma Tsani.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE PERFORMANCE AND COST OF DEBT: DOES THE BOARD OF COMMISSIONERS' CHARACTERISTICS PLAY A ROLE?.
Soedirman Accounting, Auditing and Public Sector Journal (SAAP), [S.l.], v. 2, n. 2, p. 43-53, dec. 2023.
ISSN 2962-2336.
Available at: <https://jos.unsoed.ac.id/index.php/saap/article/view/10828>. Date accessed: 05 apr. 2025.
doi: https://doi.org/10.32424/1.saap.2023.2.2.10828.
Section
article
