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06 The Effect of Environment, Social, and

Governance (ESG) Disclosures on the Cost of

Debt: Evidence from Five ASEAN Countries

Henny, Ancella Anitawati Hermawan

Abstract: This research empirically studies the effect of ESG disclosure on the cost of debt, in five ASEAN countries. This
research postulates that the lending institutions incorporated firm’s ESG information in the credit risk assessment and
their perception of the credit risk are reflected through the cost of debt offered. It also aims to understand the difference
between the ESG disclosures impact on the cost of debt of public bond relative to the bank loans. Hypotheses testing is
conducted by using 177 non-financial publicly listed companies in 2014-2018 for 5 ASEAN countries. The key finding of
this research reveals that creditors incorporate ESG disclosures when evaluating borrowers’ risk profile in their lending
decision model. This study finds that higher ESG disclosures index which represent higher ESG disclosures quality
increases the cost of debt. This finding implies that creditors perceive companies that disclose more information about
ESG may have higher risks, and the more ESG information is just a way to cover the company’s real problems. Creditors
may also concern about the companies’ spending regarding the ESG activities which may affect the companies’
capability to repay their borrowings. The result further suggests that in the ESG disclosures positive impact on the
cost of the bond is higher relative to the bank loan. This confirms the hypothesis that the bondholders rely more on
public information than banks which have more private information from the borrowers in their credit evaluation.
The additional test for each of the ASEAN 5 countries shows similar result to the main result, except in Malaysia and
Thailand. In those two countries, ESG disclosures do not have any association with the cost of debt.

Keywords
ASEAN, cost of debt, ESG disclosure index, governance, sustainability.

1. INTRODUCTION

Global investors and creditors have come to utilize the ESG (Environmental, Social, and Governance) or sustainability
information disruptively, and use the non-financial information in strategic business decisions. The company’s
sustainability performance has become matters now than ever before, it has become the megatrend in the financial
markets. Due to the promising ASEAN region economic potential, the sustainability practices and reporting through ESG
Disclosure in this region is increasingly highlighted by business practitioners, including creditors, and the regulator or
policymaker. The development of the practice of ESG or sustainability disclosure that occurs throughout the world, not
least in the ASEAN region that shows a trend of improvement. Referring to KPMG (2019), the Asia companies reporting
ESG has increased from only 49% in 2011 to significantly 78% in 2017. The number of GRI compliance reports in the Asia
Pacific, including the ASEAN region, has jumped from 25% in 2011 to 42% in 2017. Even though this supports the trend
of ESG disclosure improvement, but the ESG performance is a different angle. Climate Disclosure Standard Board (CDSB)
report (2017) on ESG reporting trend suggests that the acceleration of the ESG reporting requirements growth not
supported by the management resources that enable companies to exercise sustainability activities. The achievement
of SDGs (Sustainable Development Goals) of the ASEAN region is a global concern. In IMF Report of ASEAN Progress
Towards SDGs and the Role of IMF (2018), that reviewed the progress of the 17 SDGs that was endorsed in September
2015 by the United Nations and all ASEAN countries, ASEAN countries with varying degree across the countries are
making way toward better sustainable development through strong income and consumption growth in reducing
poverty, improved health and education. However, the region still faces challenges to achieve the SDGs by 2030 target.

ESG is defined as the framework criteria for assessing the impact of the sustainability and ethical practices of a
company’s financial performance and operations. ESG factors can strengthen the company’s competitive advantage
(through unique value creation) and as a result, significantly impact (either strengthen or weaken) the company’s
financial performance. For example, Volkswagen’s emission issue in 2015 cost the company $7 billion to cover the
costs and more than $4 billion in penalties, and not to mention the stock price significant decline as a result of it.
Recent studies have documented that ESG information is associated with plenty of economical valuable effects and
the favourable effect of ESG disclosure on firm value is affirmed by global investors (Amel-Zadeh & Serafeim, 2018). It

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