Sustainability pays: How ESG performance lowers the cost of debt in Brazil
DOI:
https://doi.org/10.1590/1808-057x20262369.enAbstract
This study investigates the relationship between environmental, social, and governance (ESG) practices and the cost of debt
(CoD) for publicly traded non-financial Brazilian companies from 2014 to 2023. This study analyzes the relationship between
ESG quality and the CoD, a topic less explored than the link between ESG and the cost of equity. Existing research mainly
focuses on developed economies or cross-country analyses, providing limited evidence for emerging markets. By examining
Brazil – where regulators have long encouraged and recently mandated ESG disclosure and its use in credit assessments – the
study addresses this gap. It offers timely evidence on how ESG transparency and performance affect credit pricing, financial
outcomes, and the mitigation of institutional weaknesses, especially in industries with higher environmental and social risk
exposure. Understanding how ESG factors shape financing conditions is vital for investors, lenders, and corporate managers
seeking to align sustainability with capital allocation and risk management, especially in markets with higher institutional
uncertainty. The empirical analysis uses panel regressions with firm fixed effects as the main approach, complemented by
the difference-generalized method of moments to address endogeneity and simultaneity, with consistent results. The CoD
is measured by interest expenses over interest-bearing liabilities, ESG performance by Refinitiv Eikon scores, and controls
include firm characteristics and macroeconomic variables. Empirical evidence shows that superior ESG performance is
significantly associated with a lower CoD for Brazilian firms. The governance pillar has the strongest and most consistent
impact, while the environmental pillar has marginal significance and the social pillar shows no meaningful relationship.
These findings underscore that strong governance reduces perceived credit risk and financing costs in emerging markets.
They also highlight the need for greater standardization of ESG taxonomies and the integration of environmental and social
risks into credit risk assessments.
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