The Impact on ESG Disclosure on Cost of Debt:Evidence from Sri Lankan SMEs

Sammanfattning

In a business environment where access to affordable finance is significant for the survival and growth of Small and Medium Enterprises (SMEs), Environmental, Social and Governance (ESG), disclosure has emerged as an important factor that can influence lenders’ perceptions and the cost of debt. This study investigates how ESG disclosure affects the cost of debt for SMEs in Sri Lanka, with special attention to environmental, social, and governance practices. Using survey data collected from 108 SMEs, the research applied descriptive statistics, correlation analysis and regression models to evaluate these relationships. The results show that ESG disclosure is generally high among Sri Lankan SMEs, with environmental practices reported slightly more strongly than social and governance practices. The analysis further indicates a negative relationship between ESG disclosure and the cost of debt, where environmental practices significantly reduce borrowing costs. Although social and governance disclosures also showed negative associations with the cost of debt and these relationships were not statistically significant. These findings suggest that lenders in Sri Lanka currently prioritize environmental performance when evaluating SME creditworthiness, while the importance of social and governance factors may still be developing. Furthermore, the study highlights ESG disclosure as both a sustainability practice and a financial strategy by showing that SMEs can improve transparency, reduce perceived risk and obtain more favourable financing conditions by strengthening their ESG practices. Beyond financial outcomes, the results also point to the broader societal value of ESG adoption, as improved sustainability practices contribute to long-term growth, resilience and alignment with global development goals.