Page 51 - SUSTAINABILITY ISSUES & COVID-19

is confirmed that firms with good ratings on material sustainability issues significantly outperform the firms with poor
ratings (Khan, Serafeim & Yoon, 2016), ESG information is value relevant and predictive of companies’ future financial
performance (Khan et al., 2016); ESG disclosures are associated with the lower cost of capital (Dhaliwal, Li, Tsang, &
Yang, 2011); and ESG performance is negatively associated with the cost of equity or “CoE” (Ng & Rezaee, 2015 and Ok
& Kim, 2019). Nevertheless, there are limited studies on ESG related to the cost of debt conducted. Erragragui (2018)
tried to find the link between Corporate Social Performance (CSP) and the creditors’ perception of the firm’s credit risk
in the credit analysis. It was found that CSP matters in creditor’s perception of the firm’s risk reflected through its impact
on the cost of debt. In the same spirit, Eliwa, Aboud, & Saleh (2019) believed that ESG practices significantly influence
the creditworthiness of a firm in the eyes of the lending institutions. Therefore, integrating information on a firm’s
ESG practices may mitigate the risks imposed which are the default risk and reputational risk, and reduce the cost of
debt charged to that firm by lending institutions. However, several prior studies suggested contradictory results, not
only a negative relationship between ESG practises and disclosures with the cost of debt was found, but some others
discovered insignificant or even a positive relationship as discussed further in the Literature Review.

This study aims to fill the gap by examining the impact of firm’s ESG disclosures on the cost of debt in the ASEAN
region. It is postulated in this study, that the lending institutions incorporated firm’s ESG information in the credit risk
assessment and additionally, their perception of the credit risk is reflected through the cost of debt offered. Where a
firm is perceived to have less credit risk, through higher ESG disclosure, consequently, the Creditor would be willing
to lend more with a lower cost of debt and vice versa. This research contends that the firm’s management would have
the interest to protect its reputation from public eyes, particularly the creditors, that signpost the firm’s credit risk
perception which would eventually have a direct impact on its cost of debt. Large companies in Indonesia have typical
high leverage of capital structure than the equity funding (due to the avoidance of ownership dilution, as found by
Haron, 2018). Whilst, the countries within the South East Asian context where it lies (post the financial crisis in 1998),
have started to issue a large sum of corporate bonds and thus, composition-wise, those countries rely less on bank
loans. Considering the typical capital structure observed and the recent development (more of the regulatory pressure),
it is interesting to examine the behaviour of ESG disclosure, as much as it is relevant to the ASEAN context, attributing
to the debt financing. The company naturally would look for choices of financing mix between the bond and bank
loan that could lower the cost of debt, driven by its ESG disclosure. With the notion that both sources are different in
characteristics, this research also has specific interest to find the evidence of the different characteristic between the
bondholders and the banks, i.e. the extent that they respond to ESG disclosures in the credit assessment, indicated
through the relative correlation magnitude.

It was found by Eliwa et al. (2019) that the impact of ESG performance and disclosure on the cost of debt is less dominant
in the less sustainable countries whereby countries as Singapore, Malaysia, Philippines, Thailand, and India are within
the category, in comparison with the sustainable countries as Scandinavian. In lieu to this finding and to reveal the
ASEAN circumstances, this research uses secondary data extracted from the Bloomberg of 177 selected companies
listed on the stock exchange market or its benchmark index in the five ASEAN countries, i.e. Indonesia, Singapore,
Malaysia, Philippines and Thailand, from 2014 to 2018. The research is a quantitative research using the Ordinary Least
Square (OLS) model or Pooled regressions, commonly used on many of ESG literature, including Eliwa et al. (2019) and
Chauhan & Kumar (2018).

Understanding the shift of stakeholders’ view to demanding more responsive/dynamic management, innovation
and focus on future trends (disruptions) is the key for Business practitioners, in particular Management of the public
companies, who may now put their concerns over strategically shift their information disclosure strategy to optimize
the benefit of ESG disclosure. This research focuses on ESG disclosure and the Cost of Debt in the five ASEAN countries
selected that exhibit ESG development in the region. This study contributes to the ESG literature, provided the
contradictory evidence from existing studies. First, in the ASEAN, since there is a need to develop literature within this
region in the attempt to understand the influencing factors on debt financing which may vary from one country to
another. Second, due to the characteristic difference of the debt sources, the study contributes evidence as to whether
the influencing factors affect the cost of bonds and the cost of bank loans differently. The firm’s management would
have the opportunity to choose between financing sources and strategically manage their ESG disclosure to get a lower
cost of debt. The research scope is limited to the ESG disclosure aspect, does not specifically cover the ESG performance
aspects nor focus on the compliance or regulatory aspect of ESG.

50 International Conference on Sustainability
(5 Sustainability Practitioner Conference)
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