Impact of environmental, social, and governance performance on cash holdings in BRICS: Mediating role of cost of capital

Abstract

As businesses globally navigate the intricate landscape of environmental, social, and governance (ESG) practices, understanding their financial implications becomes paramount. The primary objective is to illuminate the impact of ESG performance on cash holdings (CHO) within the context of the BRICS nations. Additionally, the study aims to explore the mediating role of the cost of capital (COC) in shaping these relationships. The empirical analysis was conducted on comprehensive dataset over the period 2010–2022 of BRICS. We establish the regression analysis by utilizing a fixed effect and system GMM models. The empirical findings reveal a significant negative (−0.012 coefficient value) impact of ESG performance on CHO, indicating that a one-unit increase in ESG can decrease the CHO by 1.2% and this effect is significant at 1%. This further highlights declining trend in cash reserves among companies embracing sustainability practices. Notably, the study documents the mediating role of the COC, showcasing its influence in reducing internal cash reserves in the presence of low external financing costs. The study highlights the financial benefits associated with robust ESG practices. Companies in the BRICS nations are encouraged to integrate sustainability considerations into their business strategies, recognizing the potential for reduced CHO and favorable COC outcomes. Beyond financial gains, the study underscores the societal and environmental contributions of ESG practices. This study contributes to the literature by uncovering the mediating role of the COC, providing a comprehensive understanding of how sustainability practices influence internal cash reserves in the context of diverse economic landscapes.