Impact of environmental, social, and governance disclosures on debt financing decisions: evidence from India

Abstract

In recent years, the incorporation of Environmental, Social, and Governance (ESG) disclosures into corporate strategic planning has attracted global attention, yet its implications for firms’ capital structure decisions remain underexplored, particularly in emerging markets. In light of India’s dynamic financial and regulatory developments, examining the impact of ESG disclosures on corporate debt strategies is relevant. The study explores the association between ESG disclosure and corporate debt financing practices in the Indian context. Utilizing a panel of 692 listed firms from 2011 to 2022, the study employs panel regression and two-step system GMM techniques to investigate how ESG disclosure influences access to long-term debt, cost of debt, target leverage, speed of leverage adjustment, and financial constraints. The results indicate that companies that provide extensive ESG disclosures tend to secure long-term debt at lower costs, suggesting that lenders perceive strong ESG disclosure as a signal of lower risk. Furthermore, these firms maintain their target leverage and exhibit faster adjustments when they deviate from it, reflecting enhanced financial discipline and reduced adjustment costs. Finally, high ESG disclosing firms experience significantly fewer financial constraints, emphasizing the significance of ESG in improving creditworthiness and access to capital. The results remain consistent across various model specifications and alternative variable measures. The study contributes novel empirical insights on the impact of ESG on capital structure and offers practical implications to corporate managers, institutional investors, and regulatory authorities by underlining the prominent role of transparent ESG reporting in fostering responsible financial decision-making. © The Author(s), under exclusive licence to Springer Nature B.V. 2025.