Investing in the Future: How Does ESG Influence Corporate’s Dividends, Performance and Debt Costs? Debates, Insights and Directions for Future Research

Abstract This paper explores how a company’s environmental, social and governance (ESG) practices shape key financial decisions and influence both short-term and long-term corporate strategies. It focuses on how ESG practices affect dividend payout policies, the relationship between ESG and corporate performance and how a firm’s ESG activities influence its cost of debt. Additionally, this paper highlights both the consensus and ongoing debates in the literature. Academic articles examining the impact of ESG on financial decisions were reviewed. Studies were selected using keywords such as ‘ESG,’ ‘Sustainability’ and ‘Sustainable Finance,’ paired with the terms ‘Financial decisions,’ ‘Performance’ and ‘Corporate policies.’ This review explores debates and insights of the main themes across these studies, including the influence of ESG on firm performance, dividend strategies and borrowing costs, highlighting research gaps and emerging questions. Empirical studies generally support the positive impact of ESG on corporate outcomes, emphasising the favourable signals sent to investors, stakeholders and creditors. Companies with strong ESG performance often demonstrate enhanced transparency and reputation, leading to increased firm value and dividend payouts. This improved transparency reduces information asymmetry, making firms appear more reliable and sustainable to investors. Regarding borrowing costs, studies find a negative relationship between ESG performance and the cost of debt, as firms with strong ESG profiles reduce perceived risk and access financing at lower interest rates. While many findings are supportive, the literature remains debated, with varying results across studies. This paper reviews existing perspectives and highlights contrasting arguments, contributing to the broader discussion on ESG’s financial relevance.