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The efficacy of sustainability reporting towards cost of debt and equity reduction

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Abstract

This paper empirically investigates the impact of overall sustainability reporting as well as its components (economic, environmental, and social sustainability reporting) on the cost of debt and equity capital for Malaysian oil and gas companies. The data was collected from 41 publicly listed oil and gas companies in Malaysia for the period from 2008 to 2017. Qualitative information was gathered for sustainability reporting and then converted into quantitative form by assigning weights according to the extent of reporting. The cost of capital information was sourced through Thomson Reuters Datastream. Panel data analysis was employed using generalized least square (GLS) random effects regression to examine the relationship between sustainability reporting and cost of capital. Firm reputation, size, and profitability were included as control variables. The findings indicate that overall sustainability reporting and one component, economic sustainability reporting, reduce both cost of debt and cost of equity. However, environmental sustainability reporting reduces only the cost of debt but does not reduce the cost of equity. Social sustainability reporting shows no effect on the cost of debt or equity. The findings of this paper should be useful for regulators, legislators, shareholders, creditors, and practitioners in pursuing sustainability practices that not only improve economic and environmental performance but also enhance overall performance by reducing the cost of capital. The results of the paper highlight that companies investing in sustainability can generate positive value through the enhancement of reputational capital. This study is the first to empirically investigate the relationship between overall sustainability reporting, including its three components, and the cost of both debt and equity capital.

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Notes

  1. https://tradingeconomics.com/malaysia/crude-oil-production Accessed on 15th October 2019.

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Acknowledgments

The researchers would like to acknowledge the Center of Social Innovation (CoSI) for the support to conduct this research.

Funding

This study was financially supported by the Yayasan Universiti Teknologi PETRONAS (YUTP) under Cost Center: 015LCO-188, Management and Humanities Department, Universiti Teknologi PETRONAS.

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Authors and Affiliations

  1. Management and Humanities Department, Universiti Teknologi PETRONAS, Seri Iskandar, 32610, Perak, Malaysia

    Muhammad Kashif Shad, Fong-Woon Lai & Amjad Shamim

  2. Old Dominion University, Norfolk, VA, USA

    Michael McShane

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  1. Muhammad Kashif Shad
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  2. Fong-Woon Lai
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Correspondence to Muhammad Kashif Shad.

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Shad, M.K., Lai, FW., Shamim, A. et al. The efficacy of sustainability reporting towards cost of debt and equity reduction. Environ Sci Pollut Res 27, 22511–22522 (2020). https://doi.org/10.1007/s11356-020-08398-9

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