Page 59 - SUSTAINABILITY ISSUES & COVID-19

4.1 Hypothesis H1 the Firm ESG Disclosure Index is Negatively Associated with the Cost of Debt is Not Supported
The result confirms a positive significant correlation at 1% which means that in general within the ASEAN countries, the
higher the ESG disclosure index will lead to the higher the cost of debt impact, which is in contrary with the Hypothesis
prediction that the firms with higher ESG disclosure have a lower cost of debt. As documented by Eliwa et al. (2018),
Levitt (1958) argued that lending institutions are interested in verifiable and objective information, such as profitability,
leverage, and liquidity of the borrowing firm to ensure its ability to repay the debt. This study’s result provides
contradictory evidence from Eliwa et al. (2019) that the impact of ESG performance and disclosure on the cost of debt
is less dominant in ASEAN countries that are classified as non-stakeholder-oriented countries, where the community
is more prevalent or sustainable countries such as Scandinavian countries. This key finding from this research strongly
indicated that lending institutions are significantly interested to incorporate ESG disclosure of borrowing firms when
evaluating their risk profile in their lending decision model in the ASEAN region. Nevertheless, the region may still
be perceived as less sustainable and try to increase their ESG disclosure to compensate (the symbolic approach).
The creditors perceive that ESG disclosure acts as a substitute, rather than a compliment, to ESG performance
in decreasing firms’ cost of debt, as evinced by Eliwa et al. (2019). The positive relationship may imply that within
the ASEAN context, the creditor may view the environmental concern is still a heightened risk. In ASEAN countries,
the trigger of ESG disclosure is the regulator. ASEAN companies reporting ESG, for instance, has been reported to
jump significantly and accordingly, the number of GRI compliance as well. Even though the ESG disclosure shows
a major trend of improvement, but the ESG performance itself is a different angle in the Creditors’ eyes. While ESG
performance measures what firms do, ESG disclosure is the communication of their ESG performance (Deegan, 2017),
which respectively could be seen as the substantive approach or the symbolic approach. This finding is consistent
with the social accounting literature in concluding that CSR disclosure is a tool to manage corporate image, instead of
substantive improvement in the accountability process (Cho, Michelon, & Patten, 2012; Hopwood, 2009; Merkl-Davies
& Brennan, 2007; Michelon, Pilonato, & Ricceri, 2015; Moneva, Archel, & Correa, 2006). This result is also consistent with
the notion that ESG disclosure is used by firms to enhance their reputation and to gain the benefits associated with ESG
disclosure (Brown & Deegan, 1998; Cho & Patten, 2007; Dhaliwal et al., 2011; Li et al., 2018).

As documented by Eliwa et al. (2018), despite the well-acknowledged ESG importance, their impact on the cost of
debt in academia is still a controversial issue. Some studies provide evidence of the inverse relationship between ESG
performance and the cost of debt (Hasan, Hoi, Wu, & Zhang, 2017; Ge & Liu, 2015; Goss & Roberts, 2011; Ye & Zhang, 2011;
Crifo, Diaye, & Oueghlissi, 2017), but on the other hand, other studies find an insignificant or even a positive relationship.
This study result adds to the limited number of prior studies that examine the impact of firms’ ESG performance and
disclosure on their cost of debt, which provide conflicting results. The result is aligned with the prior study that found a
positive relationship between ESG disclosure with the cost of debt. One argument was made by Erragragui (2018) that
study on the US firms’ credit risk perception topic, whereby the strength and weakness impacts of Environmental and
Governance to the firm’s cost of debt are separately evaluated. It was argued that the ESG’s strength impacting the cost
of debt does not necessarily go hand in hand with the impact created by the ESG’s weakness when they are separately
evaluated. Erragragui found that the environmental concerns specifically give rise to the increase of firms’ cost of debt
(positive relationship), while on the other hands the environmental strengths decrease the firm’s cost of debt (negative
relationship). Based on the above reasoning, ASEAN may imply the existence of environmental concern in the eyes of
creditors. In other words, the result may additionally suggest that pro-environmental management reduces COD. Jung,
Herbohn, & Clarkson (2018) find that the environmental impact of high carbon emissions is related to a higher cost of
debt. Also, Nandy & Lodh (2012) find that a more eco-friendly firm gets a more favourable loan contract than do the
firms with a lower environment score. Additionally, from the country-by-country perspective, the evidence is obtained
from three out of the five countries selected, i.e. Indonesia, Singapore and Philippines, confirming the same positive
correlation.

4.2 Hypothesis H2 and H3 the Firm ESG Disclosure Index is Negatively Associated with the Bonds YTM and Bank
Loans EIR is Not Supported.
The result shows a significant positive association between ESG disclosure index and the bonds YTM, relatively to its
impact on the bank loan. Comparing with the level of significance found between ESG disclosure with the bonds YTM
at 1% and bank loans EIR at 10%, it is seen that a notably stronger relationship exists between ESG disclosure index with
the bonds YTM, in comparison to the bank loans EIR. This provides evidence that the bondholder and bank do not have
the same feature of interest/concern in their credit evaluation.

58 International Conference on Sustainability
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