Effects of ESG practices on the cost of capital of Brazilian companies

Abstract

The acknowledgement of the need for actions to face the impacts of climate change, diversity and compliance rules leads to an increase in investments by companies that adopt sustainability practices that are becoming relevant for investor’s decisions. In Brazil, the perception of the value of adopting ESG practices is more recent and has been growing, while recognizing that economic development must occur with sustainable progress in the country. This study verifies whether the adoption of sustainability practices leads to a reduction in the cost of capital of 96 Brazilian – non-financial – companies, publicly traded, and with ESG score information for at least 3 years, within the period from 2016 to 2020, using linear multiple regressions by pooled or panel. There is a negative relationship between the environmental component and the cost of third-party capital, which confirms a growing concern on the part of countries about environmental issues. However, with the non-ratification of the hypothesis of reducing the cost of equity capital, it is indicated that creditors are more sensitive to the environmental practices of companies than their shareholders. Thus, unlike developed countries, Brazilian companies and investors are still unable to perceive the financial benefits arising from the adoption of sustainability practices, pointing to opportunities for such investments.