PhD Defence Cíntia Meireles Urbina | Essays on Environmental, Social, and Governance (ESG): Impacts on the Cost of Debt

Essays on Environmental, Social, and Governance (ESG): Impacts on the Cost of Debt

Cíntia Meireles Urbina is a PhD student in the Department of Financial Engineering. (Co)Promotors are prof.dr. L. Spierdijk and dr. X. Huang from the Faculty of Behavioural, Management and Social Sciences (UT) and prof.dr. T. Albanez and prof.dr. L. Ayres Barreira de Campos Barros from the University of Sao Paulo.

Abstract This research examines the impact of Environmental, Social, and Governance (ESG) practices on the cost of debt through a panel-data analysis. Chapter II lays the foundation by introducing two widely used proxies for the cost of debt: the interest expense ratio, an accounting metric based on historical company data, and credit ratings, a forward-looking measure of creditworthiness issued by rating agencies. The results support the hypothesis that, on average, ESG practices reduce the cost of debt. A one standard deviation increase in the ESG score is associated with an approximately 3.9% lower expected interest expense ratio, holding other variables constant. The analysis also suggests that the association between ESG practices and a lower cost of debt is stronger in countries or regions with higher governance quality, highlighting the role of institutional context in enhancing the financial relevance of ESG practices.

Chapter III focuses on the COVID-19 pandemic. The findings indicate that credit rating revisions (with an average value of -0.349) were, on average, 0.188 lower during the years 2020–2021, holding other variables constant. To assess whether firms with strong ESG practices were more resilient to such downgrades, we employed changes in ESG as a moderating variable, examining how these changes influenced credit rating revisions during the pandemic period. The findings support the hypothesis that the negative association between the pandemic and credit rating revisions was less pronounced for firms that exhibited positive ESG changes. Using a one-standard deviation increase in ∆ESG to assess the economic magnitude of the interaction term, the negative coefficient associated with the COVID-19 pandemic (-0.360) is, on average, reduced by 0.154. This finding suggests that while ESG improvements offer partial protection against negative credit rating revisions, they do not fully offset the adverse effects of the pandemic.

Chapter IV narrows the scope to environmental performance, focusing specifically on CO₂ emissions as a measurable indicator closely tied to climate change. It investigates how the Paris Agreement, recognized as a major global policy, has influenced the average relationship between emissions and the cost of debt, distinguishing between advanced and emerging markets. The findings indicate that, on average, the association between CO₂ emissions and a firm’s cost of debt intensified in the years following the Paris Agreement. Firms with CO₂ emissions one unit higher have, on average, a 1.9% higher cost of debt than firms with lower emissions, holding other variables constant. However, this effect is primarily driven by advanced markets, with no significant change observed in emerging markets. Overall, the study contributes to the existing literature by addressing the complexities of how ESG is associated with the cost of debt, as evidenced throughout the three chapters. While recent global developments suggest wavering support for ESG adoption, the findings contribute to the ongoing debate by demonstrating that ESG practices remain financially relevant for debt markets, reinforcing their strategic relevance for corporate financing decisions.