Abstract
The aim of the paper is to examine the impact of environmental, social and corporate governance (ESG) responsibility on the short- and long-term cost of debt. Linear regression was applied to a unique dataset on CSR and cost of debt for 300 companies recognized in 2017 by Corporate Knights as the most sustainable companies in the world. The question about the link between CSR and cost of debt is important as there is still ongoing debate as to whether business should undertake activities in the field of CSR—managers and other stakeholders are still unsure of the outcomes. The findings show that the involvement in environmental issues decreases the cost of long-term debt whereas the involvement in social issues brings benefits to short- and long-term debt. Surprisingly the greater the involvement in corporate governance, the higher the cost of debt in all time horizons. Managers should expect a lower cost of debt from environmental and social activities mostly in the long run. Corporate governance expenditures may in turn be seen as a waste of company resources, cost of forgone opportunities, or—optionally—as an over-investment. The main novelty is the breakdown of CSR into three dimensions while examining various term structures of corporate debt.
Highlights
The concept of sustainable development and corporate social responsibility (CSR) is gaining in importance
Linear regression was applied to a unique dataset on CSR and cost of debt for 300 companies recognized in 2017 by Corporate Knights as the most sustainable companies in the world
The conciliatory solution could be found in instrumental stakeholder theory (Donaldson & Preston, 1995), which claims that the company may benefit if it is able to develop the relationships with its stakeholders based on mutual trust and cooperation
Summary
The concept of sustainable development and corporate social responsibility (CSR) is gaining in importance. More and more companies are devoting their actions and resources to incorporate environmental, social and corporate governance responsibility strategies (Horváth et al, 2017). The subject remains widely addressed in academic research and is being driven by various factors, in particular new concerns and expectations from stakeholders due to globalisation and large scale of industrial change, implementation of social and environmental criteria into the investment process and decision making of both investors and consumers as well as transparency of business activities brought about by the mass media and modern information and communication technologies (European Commission, 2001). The question whether the company should only meet the interests of its owners or fulfil the needs of other groups of stakeholders too remains open. If the goal is long-term shareholder value maximisation it requires a meeting of the needs of the corporate environment. The conciliatory solution could be found in instrumental stakeholder theory (Donaldson & Preston, 1995), which claims that the company may benefit if it is able to develop the relationships with its stakeholders based on mutual trust and cooperation
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