The link between environmental, social and corporate governance disclosure and the cost of capital in South Africa

Abstract

Orientation: Ignoring environmental, social and corporate governance (ESG) aspects exposes firms to risks that diminish value, shrink returns and even lead to failure. Firms considering ESG aspects are perceived as less risky by capital providers. Such capital suppliers accept lower returns and lending rates when providing capital to firms with superior ESG practices and disclosure. Research purpose: To investigate the link between ESG disclosure and the cost of capital. Motivation for the study: Although there has been a growing interest in responsible corporate practices in emerging markets, limited research on ESG has been conducted in South Africa. Research approach/design and method: A positivistic paradigm was employed. A sample of 68 firms from six Johannesburg Stock Exchange sectors over the period 2011–2018 (478 firm-year observations) was examined using panel regression analyses. Main findings: A significant negative relationship was observed between composite ESG disclosure scores and weighted average cost of capital (WACC) for both consumer goods and consumer services sectors. In addition, a significant positive regression coefficient was obtained between composite ESG disclosure scores and WACC for firms from the industrials sector. Practical/managerial implications: A growing number of capital providers consider a firm’s ESG practices and disclosures which could offer a firm the opportunity to raise additional sources of capital. Contribution/value-add: Local firms that had improved ESG disclosure seemed to benefit from a lower overall WACC and cost of debt. Equity capital providers, however, seem to perceive increased ESG disclosure as additional risk and require a higher return from such firms in South Africa.