Page 60 - SUSTAINABILITY ISSUES & COVID-19

4.3 The Impact of Other Factors on the Cost of Debt
From the control variables regression result, there is evidence that cash flows from operating activities (CFO) and GDP
are significant for the banks, but not for the public bonds, while on contrary, the Leverage (LEV) is significant for the
public bonds but no evidence from the banks. Interestingly, this confirms consistent opposite results that empirically
prove that the bondholder and bank do not have the same feature of interest/concern over the control variables that
they perceive as significantly matter in their credit evaluation. The coefficient results are largely consistent with findings
in the existing literature (Gray, Koh, & Tong, 2009; Erragragui, 2018; Chauhan & Kumar, 2018), except for GDP’s positive
result. This implies that the banks may perceive that significant GDP growth may increase the banking (financial) crises
risk. There is no evidence of significant influence between the Firm Size (SIZE) and Profitability (ROE) with the cost of
bonds or bank loans.

5. CONCLUSION
The prime finding of this research supports that in the ASEAN context, ESG disclosure impact on the cost of debt is
dominant or the Creditors of both sources of funds are significantly interested to incorporate ESG disclosure of borrowing
firms when evaluating their risk profile in their lending decision model. However, the result interestingly confirms a
positive correlation which suggests that in their assessments, the creditors still see ESG disclosure from risk aversion
perspective. This leads to the more extensive the ESG disclosure by the firm is perceived to become costly (negative)
due to the increased company’s spendings and therefore increase the cost of debt, in the sense that more charitable
expenditures will decrease the firm’s liquidity and increase credit risks. 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. 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.

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). It implies that the acceleration of
the ESG reporting requirements growth in ASEAN may not be supported by the management resources that enable
companies to exercise sustainability activities. For example, the United Nations Economic and Social Commission for
Asia and the Pacific (ESCAP) reported in May 2019 that the Asia Pacific will not achieve any of the 17 SDGs (Sustainable
Development Goals) by 2030 target.

The second key finding of this research suggests that the ESG disclosure positive impact is very significant on the
cost of the bond, relatively to its impact on the bank loan. This provides evidence that the bondholder and bank do
not have the same feature of interest/concern in their credit evaluation. It strongly supports and confirms that the
bondholders incorporate ESG disclosure of the firms, and they would act similarly as the investor in the market as
they can access the company’s information on public domain and make analysis to determine the firm’s credit risk
(perception). In comparison, the banks do incorporate ESG disclosure of the firms, but in less weight or proportion
when being compared to the bondholder.
This research results have implications to the company management, creditors, regulators and policymakers.
Management would need to be conscious that an inappropriate type of disclosure will drive a higher cost of debt,
instead of reducing it, especially when the company rely much on bond financing. This is due to the market implies its
perspectives on the existence of environmental concern across ASEAN countries. Therefore, the company management
within the ASEAN region may need to strategically assess the appropriateness of the existing type of disclosure in their
sustainability reporting and take necessary action to respond to issues noted. For example, by reconsidering the type
of sustainability that is more convincing to showcase the company’s strength on future economic value creation in the
product manufacturing process and the supply chain management with the outcome of reducing carbon footprints.
Management would also be suggested to carefully look at the ESG area of weakness disclosed that may heighten the
company’s credit risk, especially when it is related to the environmental aspect, since this type of disclosure may trigger
a more expensive cost of debt, especially since the ASEAN region has already a less sustainable perception in the
eyes of the business practitioners. Moreover, the research findings support that in the ASEAN, the creditor (especially
of the public bond) are significantly interested to incorporate ESG disclosure of borrowing firms in their decision. At
the same token, the creditors are cautious that borrowers are extremely motivated to do ESG disclosure to increase

International Conference on Sustainability 59
(5 Sustainability Practitioner Conference)
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