Do ESG Practices Reduce Firms’ Cost of Debt? Evidence from the MENA Region
Based on panel data from eight MENA countries between 2019 and 2024, this study finds that firms with stronger ESG performance benefit from lower borrowing costs, as lenders view sustainable practices as a signal of reduced risk.
Original paper licensed under CC BY 4.0 (https://creativecommons.org/licenses/by/4.0/). This is an AI-generated explanation of the paper below. It is not written or endorsed by the authors. For technical accuracy, refer to the original paper. Read full disclaimer
In the world of business, money has a price. Just as a person might pay a higher interest rate on a loan if they have a shaky credit history, companies pay more to borrow money if lenders believe they are risky. For decades, lenders looked almost exclusively at financial numbers—how much profit a company made, how much debt it already held, and how easily it could pay its bills. But in recent years, a new set of factors has begun to matter. Companies are increasingly judged on how they treat the planet, how they treat their workers, and how honestly they run their internal affairs. These three areas are known as environmental, social, and governance practices. The big question for economists and business leaders is whether doing good actually helps a company's wallet. Does a reputation for responsibility make a bank more willing to lend money at a lower rate, or is it just a nice thing to do that costs extra?
A team of researchers set out to answer this question in a specific part of the world: the Arab nations of the Middle East and North Africa. This region has been rapidly changing its rules to encourage companies to be more transparent about their sustainability efforts. The researchers wanted to know if these efforts were paying off financially. They gathered data on hundreds of publicly listed companies across eight countries, including Egypt, Saudi Arabia, and the United Arab Emirates, covering the years from 2019 to 2024. They looked at the companies' scores for environmental care, social responsibility, and good governance, and then compared those scores to the actual interest rates those companies paid on their loans.
The study found a clear pattern: companies with stronger overall scores for these responsible practices paid less to borrow money. The researchers used a statistical method that allowed them to look at the same companies over time, controlling for other factors like company size and profitability. The results showed that as a company's score for responsible behavior went up, its borrowing costs went down. This suggests that lenders in this region are starting to see good behavior as a sign of lower risk. When a company manages its environmental impact, treats its people well, and runs its board of directors with integrity, lenders appear to trust it more, viewing it as a safer bet for repayment.
However, the story is not exactly the same for every part of responsible business. When the researchers broke the scores down into their three separate parts, the results varied. The environmental score, which tracks how a company manages pollution, waste, and resources, showed a strong link to lower borrowing costs. Similarly, the social score, which measures relationships with employees and the community, also pointed toward cheaper loans, though the evidence was slightly less certain. The third part, governance, which looks at how a company is run and how it avoids corruption, showed a negative trend but did not reach a level of statistical certainty in this specific group of companies. This implies that while lenders are very responsive to how a company treats the planet and its people, they may not yet be weighing the details of corporate management as heavily when deciding interest rates in this region.
To ensure these findings were solid, the researchers tested their results in several different ways. They checked if a few extreme companies were skewing the data, and they tried using different ways to calculate the cost of borrowing. In every case, the main result held true: better overall performance in these areas is associated with lower debt costs. The researchers also looked at whether the relationship might be reversed—perhaps companies that already have cheap money are just better at scoring well on these tests. Their analysis suggested this was not the case; the responsible practices themselves seem to be driving the lower costs.
This work adds a new chapter to the understanding of how money works in emerging markets. It shows that in the Arab Middle East and North Africa, the path to cheaper financing is not just about making more profit today. It is also about building a reputation for long-term stability and ethical conduct. For the companies in the study, the message is practical: investing in how they treat the environment and society is not just a moral choice, but a financial strategy that can lower the price of the capital they need to grow. For lenders and policymakers, the findings suggest that encouraging these practices helps create a more resilient financial system where risk is better understood and priced.
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