Sustainability Practices in Latin America: Does ESG Reduce the Cost of Capital?
Article Sidebar
Main Article Content
Abstract
This article examines the relationship between Environmental, Social, and Governance (ESG) performance and the cost of capital in a sample of public companies from Argentina, Brazil, Chile, Colombia, Mexico, and Peru. The panel data regressions focus on 181 entities from 2015 to 2023. Moreover, an analysis that includes the combined and pillar scores as independent variables explores the dynamics of the ESG dimensions across different capital sources. The regression estimations with economic sector and year fixed effects highlight that ESG performance reduces the cost of capital and its stock component. Specifically, environmental and social categories drive a lower cost for both. The findings confirm that ESG practices are drivers of a lower cost of capital and cost of equity, creating long-term value in the Latin American region.
Downloads
Article Details
Section
This work is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License.
This work is licensed under a Creative Commons Atribución-NoComercial-CompartirIgual 4.0 Internacional.
How to Cite
References
Arévalo, G., González, M., Guzmán, A., & Trujillo, M.-A. (2024). The Value Effect of Sustainability: Evidence from Latin American ESG Bond Market. Journal of Sustainable Finance & Investment, 14(3), 516–537. https://doi.org/10.1080/20430795.2024.2344527
Atan, R., Alam, Md. M., Said, J., & Zamri, M. (2018). The Impacts of Environmental, Social, and Governance Factors on Firm Performance: Panel Study of Malaysian Companies. Management of Environmental Quality: An International Journal, 29(2), 182–194. https://doi.org/10.1108/MEQ-03-2017-0033
Berg, F., Kölbel, J. F., & Rigobon, R. (2022). Aggregate Confusion: The Divergence of ESG Ratings. Review of Finance, 26(6), 1315–1344. https://doi.org/10.1093/rof/rfac033
Boccaletti, S., & Gucciardi, G. (2025). ESG Performance, Institutional Factors, and the Cost of Debt. Journal of Sustainable Finance & Investment, 15(3), 523–551. https://doi.org/10.1080/20430795.2025.2489386
Cornell, B. (2021). ESG Preferences, Risk and Return. European Financial Management, 27(1), 12–19. https://doi.org/10.1111/eufm.12295
De Souza, P. V. S., Dalcero, K., Ferreira, D. D. M., & Paulo, E. (2024). The Impact of Environmental Innovation and National Culture on ESG Practices: A Study of Latin American Companies. Academia. Revista Latinoamericana de Administración, 37(2), 246–264. https://doi.org/10.1108/ARLA-11-2023-0187
Drempetic, S., Klein, C., & Zwergel, B. (2020). The Influence of Firm Size on the ESG Score: Corporate Sustainability Ratings Under Review. Journal of Business Ethics, 167(2), 333–360. https://doi.org/10.1007/s10551-019-04164-1
Dua, J., & Sharma, A. K. (2024). Corporate Sustainability and Capital Costs: A Panel Evidence from BRICS Countries. Indian Journal of Corporate Governance, 17(1), 77101. https://doi.org/10.1177/09746862241240368
Ellili, N. O. D. (2020). Environmental, Social, and Governance Disclosure, Ownership Structure and Cost of Capital: Evidence from the UAE. Sustainability, 12(18), 7706. https://doi.org/10.3390/su12187706
European Commission (EC), Directorate-General for Employment, Social Affairs and Inclusion (2001). Green paperPromoting a European Framework for Corporate Social Responsibility. Green Paper. Office for Official Publication of the European Communities, COM (2001) 366 final. https://op.europa.eu/en/publication-detail/-/publication/dd331f0e-82d2-4d3d-8cd0-6c8eee07bb99/language-en
Freeman, R. E. (2004). The Stakeholder Approach Revisited. Zfwu Zeitschrift Für WirtschaftsUnd Unternehmensethik, 5(3), 228–241. http://dx.doi.org/10.5771/1439880X-2004-3-228
Friedman, M. (2007). The Social Responsibility of Business Is to Increase Its Profits. In: Zimmerli, W.C., Holzinger, M., Richter, K. (eds) Corporate Ethics and Corporate Governance. Springer. https://doi.org/10.1007/978-3-540-70818-6_14
Garzón Jiménez, R., & Zorio-Grima, A. (2021). Sustainability Engagement in Latin America Firms and Cost of Equity. Academia. Revista Latinoamericana de Administración, 34(2), 224–243. https://doi.org/10.1108/ARLA-05-2020-0117
Gjergji, R., Vena, L., Sciascia, S., & Cortesi, A. (2021). The Effects of Environmental, Social and Governance Disclosure on the Cost of Capital in Small and Medium Enterprises: The Role of Family Business Status. Business Strategy and the Environment, 30(1), 683–693. https://doi.org/10.1002/bse.2647
Gupta, S., & Aggarwal, D. (2023). Shrinking the Capital Costs and Beta Risk Impediments through ESG: Study of an Emerging Market. Asian Review of Accounting, 32(2), 249–277. https://doi.org/10.1108/ARA-05-2023-0130
Hang, M., Geyer-Klingeberg, J., Rathgeber, A. W., & Stöckl, S. (2018). Measurement matters— A Meta-Study of the Determinants of Corporate Capital Structure. The Quarterly Review of Economics and Finance, 68, 211–225. https://doi.org/10.1016/j.qref.2017.11.011
Henry, E., Jiang, X., & Rozario, A. M. (2024). Environmental Discourse and Firm Value: Evidence from Conference Calls. Journal of Accounting, Auditing & Finance. https://doi.org/10.1177/0148558X241278398
Hluszko, C., Barros, M. V., Souza, A. M. de, Ramos Huarachi, D. A., Castillo Ulloa,
M. I., Moretti, V., Puglieri, F. N., & de Francisco, A. C. (2024). Sustainability in Practice: Analyzing Environmental, Social and Governance Practices in Leading Latin American Organizations’ Reports. Cleaner Production Letters, 7, 100069. https://doi.org/10.1016/j.clpl.2024.100069
Huang, D. Z. X. (2021). Environmental, Social and Governance (ESG) Activity and Firm Performance: A Review and Consolidation. Accounting & Finance, 61(1), 335–360. https://doi.org/10.1111/acfi.12569
International Monetary Fund (IMF) (n.d.). International Financial Statistics. https://legacydata.imf.org/?sk=4c514d48-b6ba-49ed-8ab9-52b0c1a0179b
Javed, M., Rashid, M. A., Hussain, G., & Ali, H. Y. (2020). The Effects of Corporate Social Responsibility on Corporate Reputation and Firm Financial Performance: Moderating Role of Responsible Leadership. Corporate Social Responsibility and Environmental Management, 27(3), 1395–1409. https://doi.org/10.1002/csr.1892
Jensen, M. C., & Meckling, W. H. (1976). Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure, Journal of Financial Economics, 3(4), 305360. https://doi.org/10.1016/0304-405X(76)90026-X
Khanchel, I., & Lassoued, N. (2022). ESG Disclosure and the Cost of Capital: Is There a Ratcheting Effect over Time? Sustainability, 14(15), 9237. https://doi.org/10.3390/su14159237
KPMG. (2023, January). Grandes cambios, pequeños pasos: Reporte de sostenibilidad en Latinoamérica 2022: avances y retos sobre la gestión corporativa en asuntos ESG en Latinoamérica. https://assets.kpmg.com/content/dam/kpmg/co/sac/pdf/2023/03/bc-ESG-esp.pdf
Lavin, J. F., & Montecinos-Pearce, A. A. (2022). Heterogeneous Firms and Benefits of ESG Disclosure: Cost of Debt Financing in an Emerging Market. Sustainability, 14(23), 15760. https://doi.org/10.3390/su142315760
LSEG Data & Analytics. (2024, October). Environmental, Social and Governance Scores from LSEG. https://www.lseg.com/content/dam/data-analytics/en_us/documents/methodology/lseg-esg-scores-methodology.pdf
LSEG Data & Analytics (n.d.) LSEG Workspace. https://www.lseg.com/en/dataanalytics/products/workspace
Mertzanis, C., Marashdeh, H., Nasrallah, N., & Islam, A. R. M. (2024). Sustainable Investment Conditions and Firm Performance in the Middle East and North Africa: a Holistic Approach. Journal of Sustainable Finance & Investment, 1–38. https://doi.org/10.1080/20430795.2024.2303492
Ng, A. C., & Rezaee, Z. (2015). Business Sustainability Performance and Cost of Equity Capital. Journal of Corporate Finance, 34, 128–149. https://doi.org/10.1016/j.jcorpfin.2015.08.003
Organization for Economic Cooperation and Development (OECD). (2024). Global Corporate Sustainability Report 2024. OECD Publishing, https://doi.org/10.1787/8416b635-en
Organization for Economic Cooperation and Development (OECD), United Nations Economic Commission for Latin America and the Caribbean (ECLAC), Development Bank of Latin America and the Caribbean (CAF), & European Commission (EC). (2024). Latin American Economic Outlook 2024: Financing Sustainable Development, OECD Publishing, https://doi.org/10.1787/c437947f-en
Orlitzky, M., Schmidt, F. L., & Rynes, S. L. (2003). Corporate Social and Financial Performance: A Meta-Analysis. Organization Studies, 24(3), 403–441. https://doi.org/10.1177/0170840603024003910
Pástor, L‘., Stambaugh, R. F., & Taylor, L. A. (2022). Dissecting Green Returns. Journal of Financial Economics, 146(2), 403–424. https://doi.org/10.1016/j.jfineco.2022.07.007
Possebon, E. A., Cippiciani, F. A., Savoia, J. R., & de Mariz, F. (2024). ESG Scores and Performance in Brazilian Public Companies. Sustainability, 16(13), 5650. https://doi.org/10.3390/su16135650
Postiglione, M., Carini, C., & Falini, A. (2024). ESG and Firm Value: A Hybrid Literature Review on Cost of Capital Implications from Scopus Database. Corporate Social Responsibility and Environmental Management, 31(6), 6457–6480. https://doi.org/10.1002/csr.2940
Priem, R., & Gabellone, A. (2024). The Impact of a Firm’s ESG Score on Its Cost of Capital: Can a High ESG Score Serve as a Substitute for a Weaker Legal Environment. Sustainability Accounting, Management and Policy Journal, 15(3), 676–703. https://doi.org/10.1108/SAMPJ-05-2023-0254
Ramirez, A. G., Monsalve, J., González-Ruiz, J. D., Almonacid, P., & Peña, A. (2022). Relationship between the Cost of Capital and Environmental, Social, and Governance Scores: Evidence from Latin America. Sustainability, 14(9), 5012. https://doi.org/10.3390/su14095012
Rojo-Suárez, J., Alonso-Conde, A. B., & Gonzalez-Ruiz, J. D. (2024). Does Sustainability Improve Financial Performance? An Analysis of Latin American Oil and Gas Firms. Resources Policy, 88, 104484. https://doi.org/10.1016/j.resourpol.2023.104484
Schoenmaker, D., & Schramade, W. (2019). Investing for Long-Term Value Creation. Journal of Sustainable Finance & Investment, 9(4), 356–377. https://doi.org/10.1080/20430795.2019.1625012
Stolper, A., O’Leary, R., Zhou, Y., Mendes Correa, M., Seco, M. L., Martínez, A. G., & Llamazales, J. M. (2024). The Guide to Environmental, Social and Corporate Governance: Status and Pitfalls of ESG Standards in Latin America (2nd ed.). Latin Lawyer. https://tinyurl.com/5n8d37xm
Tawfiq, T. T., Tawaha, H., Tahtamouni, A., & Almasria, N. A. (2024a). The Influence of Environmental, Social, and Governance Disclosure on Capital Structure: An Investigation of Leverage and WACC. Journal of Risk and Financial Management, 17(12), 570. https://doi.org/10.3390/jrfm17120570
United Nations Global Compact (UNGC). (2004). Who Cares Wins: Connecting the Financial Markets to a Changing World: Recommendations by the Financial Industry to Better Integrate Environmental, Social and Governance Issues in Analysis, Asset Management and Securities Brokerage. Swiss Federal Department of Foreign Affairs, United Nations. https://documents1.worldbank.org/curated/en/280911488968799581/pdf/113237-WP-WhoCaresWins-2004.pdf
United Nations Department of Economic and Social Affairs (UN DESA). (n.d.). Sustainable Development Goals. https://sdgs.un.org/goals
United Nations Development Programme (UNDP). (2025). Under Pressure: Recalibrating the Future of Development in Latin America and the Caribbean. (Regional Human Development Report 2025). United Nations Development Programme. https://www.undp.org/latin-america/publications/regional-human-developmentreport-2025-under-pressure-recalibrating-future-development-latin-americaand-caribbean
Van Holt, T., & Whelan, T. (2021). Research Frontiers in the Era of Embedding Sustainability: Bringing Social and Environmental Systems to the Forefront. Journal of Sustainability Research, 3(2), e210010. https://doi.org/10.20900/jsr20210010
Velte, P. (2022). Meta-Analyses on Corporate Social Responsibility (CSR): A Literature Review. Management Review Quarterly, 72(3), 627–675. https://doi.org/10.1007/s11301-021-00211-2
Wahl, A., Charifzadeh, M., & Diefenbach, F. (2020). Voluntary Adopters of Integrated Reporting – Evidence on Forecast Accuracy and Firm Value. Business Strategy and the Environment, 29(6), 2542–2556. https://doi.org/10.1002/bse.2519
Wong, W. C., Batten, J. A., Ahmad, A. H., Mohamed-Arshad, S. B., Nordin, S., & Adzis, A. A. (2021). Does ESG Certification Add Firm Value? Finance Research Letters, 39, 101593. https://doi.org/10.1016/j.frl.2020.101593
Wooldridge, J. M. (2013). Introductory Econometrics: A Modern Approach (5th ed.). Cengage Learning.