Trends on environmental, social and governance (ESG), business risk, and corporate leverage

Every company that borrows money to grow faces a fundamental tension. On one side, there is the business itself: the factories, the sales, the supply chains, and the daily uncertainty of whether customers will show up or costs will rise. On the other side, there is the way the company is run and how it presents itself to the world, including its care for the environment, its treatment of workers, and the honesty of its leadership. For decades, financial experts have looked at these two sides separately. They have studied how the uncertainty of daily operations affects how much debt a company can safely carry, and they have studied how a company's reputation for good behavior influences its ability to get loans. But these two streams of thought have rarely met in the same room. This new research brings them together to see how the daily risks of running a business and the broader values of a company work side-by-side to shape a single, critical number: how much debt a firm takes on.

The researchers, working from the University Jenderal Soedirman, set out to map this complex landscape. They were not looking for a simple rule that says "good companies get more debt" or "risky companies get less." Instead, they wanted to understand the different paths that lead to a company's borrowing decisions. To do this, they combined two powerful tools. First, they used a digital mapping technique to scan thousands of scientific articles, looking for how often specific words appeared together. This helped them see the big picture of how the field has grown and where the connections lie. Second, they performed a deep, careful reading of fifteen specific studies that directly linked environmental and social values, business risks, and borrowing levels. This two-part approach allowed them to see both the forest and the individual trees.

The digital map revealed a clear shift in how scientists are thinking. In the past, discussions about environmental and social values were often kept in a separate box from discussions about money and finance. Today, those boxes are merging. The map showed that words like "governance," "financing costs," and "debt" are now tightly woven into the same network as "environmental" and "social" values. This suggests that investors and lenders are no longer just looking at a company's profit sheet; they are using its values and practices to decide how risky it is to lend them money. However, the map also showed a gap. While the values of a company are well-connected to financial discussions, the specific concept of "business risk"—the uncertainty of daily operations like sales and production—was scattered and less clearly linked to the big picture. It appeared under many different names, making it harder to see how it fits with the company's values.

To fill in these gaps, the researchers looked closely at the fifteen selected studies. They found that the relationship between a company's values and its borrowing is not a straight line. Instead, it travels through several distinct channels. One channel is about information and trust. When a company is transparent about its environmental and social practices, it reduces the uncertainty for lenders. It signals that the company is well-managed and honest, which can lower the cost of borrowing and make lenders more willing to provide funds. Another channel is about governance. Strong leadership and clear rules can prevent a company from taking reckless risks, which in turn makes it a safer bet for creditors.

At the same time, the researchers confirmed that the daily uncertainty of the business itself operates through a completely different set of rules. This is the "business risk" side of the equation. If a company's sales swing wildly from month to month, or if its costs are unpredictable, it faces a different kind of danger. High uncertainty means the company might not have enough cash on hand to pay its bills if things go wrong. Because of this, companies with high daily uncertainty tend to be more cautious. They often choose to borrow less, or they borrow only short-term amounts, to avoid the danger of being unable to pay back a large loan if their business hits a rough patch. This is a mechanical reality of running a business, separate from how good or bad the company's values are.

The most important finding of this work is that these two forces—the values of the company and the uncertainty of its daily operations—work in parallel but do not mix. A company can have excellent environmental values, which makes it look good to lenders, but if its daily sales are highly unstable, it still faces a high risk of default. Conversely, a company with very stable daily operations might still struggle to get good loan terms if its governance is poor or its environmental record is weak. The study argues that we cannot treat these as the same thing. One is about the company's character and how it is run; the other is about the physical and economic volatility of its work.

The researchers also pointed out that comparing different studies is difficult because everyone measures these things differently. One study might look at a company's total debt compared to its assets, while another looks at long-term loans only. One might measure "business risk" by how much sales fluctuate, while another looks at how much profit swings. This lack of a common language makes it hard to say exactly how strong the relationship is between a company's values and its borrowing. The authors suggest that future research needs to use more consistent ways of measuring these factors. They also recommend looking at the different parts of environmental, social, and governance values separately, rather than lumping them all into one score, because each part might influence borrowing in its own unique way.

Ultimately, this research provides a clearer map for understanding corporate finance. It shows that a company's decision to take on debt is the result of two distinct conversations. One conversation is about the company's reputation, its honesty, and its long-term vision. The other is about the immediate, hard realities of its daily operations and how much those operations might wobble. By keeping these two conversations separate but acknowledging that they happen at the same time, we get a much more accurate picture of why companies borrow what they borrow. The study does not claim to have solved the mystery of corporate debt, but it has successfully separated the threads that were previously tangled, offering a more precise way to understand the complex forces that shape the financial lives of businesses.