Impact of ESG ratings on the borrowing cost, evidence from Asia-Pacific region

Abstract

This paper studies the impact of ESG ratings, in conjunction with the particular dimension, on the companies’ borrowing cost. Also, this is the first paper that study the impact of level of ESG disclosure, voluntary and mandatory disclosure, on the borrowing cost of the firms.

The findings show that only ESG disclosure score has significantly lower the borrowing cost of the companies through the environmental and corporate governance dimensions. It can be concluded that lending institutions do take into account the ESG disclosure score, which integrated risk management framework of firm, as an additional explanation factor over the financial factors. Besides, they concentrate on the dimensions that have ability to mitigate reputation risk of the firms in evaluating cost of borrowing process.

Nevertheless, the mandatory level of ESG disclosure does not lessen the borrowing cost. Mandatory disclosure force firms to reveal the actual information of their ESG activities in all aspects. Therefore, the true quality of the firms is observable, and thus reducing asymmetric information among lenders and borrowers. However, it does not mean that the borrowing cost will be decreased as a result.