The effect of environment, social and governance on demand and supply of debt

Flávio Morais, Joaquim Ferreira, Luís Marques and Joaquim Ramalho

Applied Economics, 2025, vol. 57, issue 21, 2781-2792

Abstract: This paper investigates how Environment, Social and Governance (ESG) performance affects the zero-leverage phenomenon. Using a sample of European-listed firms for the 2002–2020 period and bivariate probit models with partial observability, we find that a greater ESG performance decreases the firm’s propensity to have zero leverage. The negative effect of ESG performance on zero leverage is determined by creditors-related reasons and not by firms’ own decisions, since it only impacts significantly the supply of debt. Creditors seem to be willing to grant debt at more favourable conditions to firms with greater ESG performance. Using propensity score methods, we estimate that a greater ESG performance decreases a firm’s zero-leverage propensity by approximately 3.9% points.

Date: 2025
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DOI: 10.1080/00036846.2024.2331422

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