Does Sustainability Pay Off? Examining Governance, Performance, and Debt Costs in Southeast Asian Companies (A Survey of Public Companies in Indonesia, Malaysia, Singapore, and Thailand for the 2021–2023 Period)

Abstract

Sustainability performance is an important criterion for investors and lenders when making financing decisions. This study aims to analyze whether sustainability governance influences sustainability performance and the extent to which sustainability performance affects a company’s cost of debt. This study analyzed 209 publicly listed companies in Indonesia, Malaysia, Singapore, and Thailand. Sustainability governance was measured using two proxies from the Refinitiv Eikon database: (1) the existence of a sustainability committee and (2) the existence of sustainability assurance. Sustainability performance and the cost of debt were assessed using scores obtained from the same database. Quantitative analysis was performed using descriptive statistics, ANOVA, and structural equation modeling (SEM) with path analysis. The results showed that sustainability governance has a strong positive impact on sustainability performance. However, the results also show that higher sustainability performance leads to a higher cost of debt. This finding suggests that companies that integrate sustainability into their core business strategies face challenges in obtaining funding to support sustainability initiatives. This research implies that a well-developed sustainable ecosystem needs to be established before companies can realize a lower cost of debt.

1. Introduction

In recent years, trends towards sustainability have been seen more frequently, especially in the business sphere. The three pillars by which sustainability performance is measured are environmental, social, and governance (ESG). ESG is used to identify corporate activities that have a potential or direct impact on these three pillars and to emphasize long-term sustainable value creation. Companies use ESG to assess and report the potential impact of their activities. ESG is a major concern for companies, regulators, investors, and other stakeholders, particularly in response to the global sustainability crisis. ESG is now frequently used as a benchmark for investment decisions, as investors are no longer evaluating company performance only from the financial side but also from the non-financial side, such as ESG (Park & Oh, 2022).

Companies with good ESG performance will outperform competition, attract investor attention, and be valued more highly by the market (Malik & Kashiramka, 2024). Good ESG performance results from institutional quality, or it can be said that a company has good sustainability performance (Pinheiro et al., 2023; Yang et al., 2024). The implementation of ESG has received increasing attention in Indonesia since the Financial Services Authority (OJK) introduced a policy in the form of the Indonesian Green Taxonomy (THI) Guidelines in 2022. In the THI guidelines, OJK divides business into three categories: green, yellow, and red. These categories are based on the level of sustainability and the risks that the company’s operations may entail in the environment. Companies engaged in the financial sector as distributors of funds will consider ESG disclosures according to the category of business to be funded, which in turn can affect creditworthiness and the interest rate given.

In addition to conventional financing, green financing has been widely adopted, including financial investment instruments used to finance “green” activities or support sustainability, such as the issuance of environmentally sound debt securities or green bonds, green investing, and green asset financing (Sinha et al., 2023). Green bonds are issued by companies to raise funds that are later used to finance projects that provide sustainable benefits to the environment. Green bonds can be a capital financing option from debt that is considered favorable when companies are looking for large amounts of financing at low interest rates because green bond issuance spreads can reach an average of 35 to 40 basis points (bps) lower than equivalent conventional bonds, noting that this spread discount is still influenced by the issuer’s sector (Teti et al., 2022) so that green bonds now have their own high appeal in the current market conditions.

In addition to lowering risks and improving ESG performance scores, green investments also help companies reduce environmental violations, which in turn can strengthen the impact of green investments on improving the long-term performance of companies (Chen & Ma, 2021). In addition to risk reduction from an environmental perspective, social aspects also benefit from green investment, albeit to a lesser extent. Companies that excel in social responsibility are often viewed as having lower risk and thus can reduce the potential, but not eliminate, legal liability related to social issues so that the value of the social pillar in the company’s ESG performance score will increase (Cao et al., 2023).

ESG assessment is measured by considering the level of risk and the company’s ability to handle or control that risk (Feng & Mohd Saleh, 2024). The assessment begins with a comprehensive evaluation of the exposure to each material ESG issue at the sub-industry level that provides insight into potential risks and then the risk evaluation identifies which parts can be effectively managed through ESG programs and policies (Sciarelli et al., 2023). With the understanding that each industry experiences different challenges, the calculation of risk elements that are inherently unmanageable by a particular company was considered. The evaluation of risk segments that are inherently unmanageable will be compared to the company’s performance, as reflected through sustainability policies, which provides a clear understanding of the effectiveness of a company’s risk management (Nurrizkiana et al., 2024). The gap between the two highlighted areas remains unmanaged, and the resulting controversy will impact the company’s management score.

Achieving good ESG performance involves setting clear targets and key performance indicators (KPIs), which in turn develops a roadmap that explains how these targets will be met and progress reported. High ESG performance is considered favorable and has a positive impact on the cost and amount of corporate debt financing, where companies with high ESG ratings can benefit by reducing the cost of corporate debt financing either by lowering bank lending rates or by increasing the size of trade credit (Shi et al., 2024) which in turn can lead to a larger amount of debt financing (Guo et al., 2024). Therefore, companies are more resilient to economic crises due to the easing effect of corporate financing constraints (Gao & Geng, 2024). When viewed as a mediator, ESG not only directly but also indirectly reduces the cost of equity capital because ESG scores can reduce a company’s market risk (Chen et al., 2022). The additional information contained in the ESG scoring component has an economically significant negative relationship with the cost of debt, where the returns to a lower cost of debt from investing in sustainability are more pronounced for firms in bank-based financial systems than for firms in market-based financial systems (Alves & Meneses, 2024).

High ESG performance can be achieved when a company provides comprehensive ESG reporting, which reflects its commitment to fulfilling environmental and social responsibilities (Shi et al., 2024). Good corporate governance is needed to improve ESG performance (Shi et al., 2024) and expand and improve ESG disclosure assessment (Ferdous et al., 2024). ESG pillars have different effects on reducing the cost of corporate debt. The governance pillar has the most prominent influence on corporate debt financing costs, followed by the environmental pillar, while the social pillar has the least influence in reducing corporate debt financing costs (Shi et al., 2024). Sustainability governance comprises norms, principles, and cultures that are enforced and consider ESG factors. Later, this sustainability governance will strengthen the company in dealing with risks that may arise from its operational activities and enable it to adapt to unexpected changes. In Indonesia, the average ESG disclosure assessed by LSEG is only 42.08% (Rahmaniati & Ekawati, 2024). This indicates that the sustainability governance implemented in Indonesia is still minimal, which can have an impact on the company’s ESG performance.

To achieve this goal, companies must disclose matters related to sustainability governance, one of which is the disclosure of the existence of the sustainability committee. Although companies have adapted to changes in sustainability-related regulations and demands, many sustainability-related matters are assigned to other committees so sustainability committees should be formed to comply with corporate governance recommendations (Elmaghrabi, 2021) in addition to assisting companies in implementing sustainability strategies and improving board monitoring of ESG-related actions and responsibilities adopted by companies that can improve ESG performance (Alcaide-Ruiz et al., 2022). In the future, the scope of duties and responsibilities of sustainability committees is not limited to occasional sustainability oversight and evaluation but evolves into a coordination center that must proactively manage complex sustainability issues and liaise with other committees. The existence of a sustainability committee has different effects on company performance depending on the sector and dimensions of the company’s work. In some sectors, sustainability committees are associated with better profitability, as shown by increased pre-tax return on equity (ROE) in the primary consumer and real estate sectors, but in other sectors, such as the financial sector, the presence of sustainability committees has a negative effect on pre-tax return on assets (ROA) (Tron et al., 2025). However, the presence of a sustainability committee clearly has a positive impact on environmental performance, especially in companies that have a direct impact on the environment (Y. Li et al., 2021b), and a positive influence on the company’s market value (Orazalin et al., 2023).

The credibility of sustainability reports disclosed by companies to stakeholders should also be strengthened through external audits and oversight from governments or regulators (Demirtas et al., 2024). Gradually, consideration should be given to annual assurance attestations by independent, competent, and qualified service providers in accordance with high-quality international assurance standards to provide an external and objective assessment of corporate sustainability-related disclosures (Moroney et al., 2011). This is in line with the need for external assurance support, as stipulated in Global Reporting Initiative (2021) Index standard 102-56: External Assurance.

In countries with good government policies, companies are more likely to adopt incentives such as sustainability-related compensation. Compensation is provided by companies to top management, who focus on sustainability. However, such compensation exacerbates the agency problem in top management’s pay (Z. Li & Thibodeau, 2019). The compensation provided must be aligned with sustainability performance metrics to improve the control and credibility of sustainability report disclosure (Lewa et al., 2025). If the control and credibility of sustainability report disclosure can be improved, the compensation provided to top management can significantly improve the ESG performance of the company. This effect is achieved through the encouragement of green innovation efficiency, which leads to increased disclosure of environmental information and improved financial performance.

This study was conducted to analyze the impact of the disclosure of sustainability-related governance in sustainability reports on ESG performance and its implications for the cost of debt of companies listed on the Indonesia Stock Exchange (IDX) for the period 2021–2023. This research is important in Indonesia because there is still a lack of studies on the impact of sustainability-related governance disclosures on sustainability reports on ESG performance and its implications for the cost of corporate debt in Indonesia. Several research contributions have been made to both theory and practice. For companies, this study provides information on the role of sustainability governance in improving ESG performance, which in turn can have an impact on obtaining more diverse sources of funding for activities. For creditors, this research can be used as decision-making material when channeling funding to companies in different sectors based on information on ESG scores as an indicator of performance and risk in the environmental, social, and corporate governance spheres. For regulators, this research can be an input material related to sustainability governance and can map the condition of companies in Indonesia in carrying out governance that supports efforts to achieve sustainability. In general, this study is expected to be a reference for further research development by exploring other variables related to sustainability-related governance, ESG, and their impact on corporate funding decisions with more adequate data availability.

2. Literature Review and Hypothesis Development

2.1. Sustainability Accounting Theory

Sustainability accounting theory has emerged as a crucial framework for understanding and measuring the environmental, social, and governance (ESG) impacts of corporate activities. It encompasses the identification, measurement, and reporting of an organization’s sustainability performance, extending beyond traditional financial accounting to include non-financial metrics (Ahmad et al., 2023; Ed-Dafali et al., 2024). The importance of sustainability accounting lies in its ability to provide a comprehensive view of a company’s overall performance and long-term viability. It enables stakeholders to assess an organization’s commitment to sustainable practices and its potential to create value in the long run. Research indicates that robust sustainability accounting practices can lead to enhanced corporate financial performance, with 78% of studies reporting a positive relationship between corporate sustainability and financial outcomes (Alshehhi et al., 2018). Governance plays a critical role in sustainability accounting as it sets the tone for an organization’s approach to ESG issues. Studies have shown that effective governance mechanisms such as board diversity and strategic integration of ESG criteria are key drivers of improved ESG performance and corporate profitability (Ed-Dafali et al., 2024). Furthermore, green corporate governance has been found to have a significant impact on corporate social responsibility (CSR), which positively affects sustainable performance (L. Wang et al., 2023). The relationship between sustainability accounting and corporate performance is complex but generally positive. Research suggests that adopting ESG policies enhances businesses’ innovation capacity, value creation, and financial performance of businesses (Ahmad et al., 2023). However, some studies have found that CSR contracting in executive compensation programs can negatively impact financial performance, particularly for firms with a shareholder-focused governance model (Cavaco et al., 2020). Regarding the cost of capital, sustainability accounting practices can influence investors’ perceptions and risk assessments. Although not explicitly addressed in the provided studies, the literature suggests that improved ESG performance and disclosure can lead to lower costs of capital due to reduced perceived risk and improved stakeholder relations (Ahmad et al., 2023; Ed-Dafali et al., 2024).

Sustainability accounting theory provides a framework for understanding the complex interplay between corporate sustainability practices, governance, and financial performance (Putri & Pratama, 2023). While most studies indicate a positive relationship between sustainability efforts and financial outcomes, the specific impacts can vary based on factors such as governance structure, industry, and regional context (Alshehhi et al., 2018; Ed-Dafali et al., 2024; L. Wang et al., 2023). As sustainability concerns continue to grow, further research is needed to develop a more nuanced understanding of these relationships and to provide clearer guidance for policymakers and corporate managers in fostering sustainable business practices (Ed-Dafali et al., 2024).

2.2. Sustainability Governance

Governance is an ESG pillar. Given that sustainability trends are receiving more attention from stakeholders, companies can choose how to integrate sustainability strategies and policies into their corporate governance to meet stakeholder expectations. Companies can decide to integrate sustainability-related governance and make special efforts to manage social and environmental issues (Minciullo et al., 2022). Sustainability-related governance can be defined as a set of written and unwritten rules that link social and environmental responsibility with corporate governance norms (Popović Šević & Bajalski, 2019).

Sustainability committees, sustainability assurance, and ESG-based compensation play a crucial role in enhancing corporate sustainability performance. Board-level sustainability committees and sustainability reporting assurance have a positive and significant association with the inclusion of sustainability terms in CEO compensation contracts (Al-Shaer & Zaman, 2017). This suggests that companies investing in voluntary assurance are more likely to monitor management behavior and focus on achieving sustainability goals. The presence of sustainability committees and assurance practices can help assess CEO performance in sustainability-related tasks, especially when sustainability metrics are included in compensation contracts (Al-Shaer & Zaman, 2017). Furthermore, executive compensation incentives significantly enhance corporate ESG performance by promoting corporate social responsibility, enhancing internal control quality, and improving financial performance (Zhu et al., 2023). Interestingly, the positive impact of executive compensation incentives on corporate ESG performance diminishes with increasing management shareholding but strengthens with a higher proportion of independent directors (Zhu et al., 2023). However, it is important to note that, when compensation exceeds appropriate levels, overcompensation can lead to a decline in corporate ESG performance (Zhu et al., 2023). This highlights the need for a balanced approach to designing ESG-based compensation structures. The integration of sustainability committees, assurance practices, and ESG-based compensation can create a robust framework for promoting corporate sustainability. These mechanisms work together to ensure that sustainability goals are not only set but also actively pursued and monitored, aligning management interests with long-term sustainable development strategies.

2.3. Sustainability Performance

Sustainability performance refers to the extent to which a company’s strategies and policies can manage ESG-related operational risks. Good sustainability performance reflects a company’s commitment to sustainability and can increase its competitiveness and reputation in the market (Nagiah & Mohd Suki, 2024). Sustainability performance is also an important indicator for investors when assessing non-financial risks that can affect company value in the long term (Z. Wang & Sarkis, 2017). Sustainability performance measurements present significant challenges across various sectors and contexts. In agriculture, farmers and policymakers struggle to support sector sustainability because of the complexity of the concepts involved and the extensive debate about data requirements, appropriate indicators, evaluation methods, and tools (Tzouramani et al., 2020). This challenge extends to supply chains, where implementing supplier environmental performance measurement models in global contexts faces numerous obstacles (Genovese et al., 2013). Interestingly, while strategic environmental assessment can be a powerful tool for fostering progress towards sustainability, its effective implementation involves confronting substantial challenges. These include limited information, unavoidable uncertainties, boundary-setting complexities, primitive methodologies, and difficulties in defining the proper role of public participants (Stinchcombe & Gibson, 2001). Startups in the business sector face unique challenges in implementing sustainable business models, particularly in emerging countries. The main barriers are often linked to the institutional, organizational, market, and sales culture categories (Nunes et al., 2022). Thus, sustainability performance measurement requires a holistic approach that considers multiple dimensions and stakeholders. The complexity of sustainability concepts, data requirements, and evaluation methods necessitates the development of robust, efficient, and usable frameworks (Genovese et al., 2013; Tzouramani et al., 2020). Future research should focus on developing integrated strategies that address socioeconomic, market, and endogenous issues to ensure reliable sustainability performance measurements across various sectors and contexts (Nepal et al., 2024).

2.4. Cost of Debt

The cost of capital is a representation of the funding costs incurred by the company as well as the minimum rate of return on a project to increase the value of the company and obtain capital. Projects with a higher return on investment than the cost of capital increase the value of the company. The cost of capital is related to long-term corporate financing investment decisions and can affect the welfare of company owners, as reflected in stock prices. The funding carried out by the company can come from the issuance of shares (cost of equity) or debt (cost of debt). The cost of debt represents the cost of borrowing each additional debt. This reflects the current interest rate and the level of default risk perceived by creditors (Depamphilis, 2011). A low cost of debt benefits the company because the allocation of funds owned by the company is more efficient if used for investment and development. The amount of debt costs impacts the company’s profits and creditors’ perceptions of the company’s financial stability. A high cost of debt indicates that the company has a high risk. This applies vice versa; a low level of debt cost indicates that the company can manage risk well and increases the attractiveness of the company (Zhou et al., 2018).

Green financing and its impact on companies’ cost of debt show a complex relationship, with varying effects depending on different factors and contexts. Studies indicate that high corporate social responsibility (CSR) performance, including environmental responsibility, is associated with a lower cost of debt for polluting companies (Y. Li et al., 2021b). This suggests that companies engaging in green practices may benefit from reduced debt financing costs. Similarly, green innovation has been found to increase firm value by reducing debt financing costs, particularly for companies in the growth and decline stages of their life cycles (Dai & Xue, 2022). However, contradictory findings have been reported in the literature. The implementation of green credit policies in China has led to increased debt financing costs for heavily polluting industries (W. Li et al., 2021a). This indicates that green financing initiatives can result in higher borrowing costs for certain sectors. Interestingly, some studies find no significant relationship between environmental information disclosure and corporate debt financing costs (Du et al., 2022), suggesting that the impact of green practices on debt costs may not be uniform across all contexts. In conclusion, while green financing can potentially lower the cost of debt for companies with strong environmental performance, this relationship is not straightforward. Factors such as industry type, company life cycle stage, and specific green finance policies can influence this relationship. These mixed findings highlight the need for further research to fully understand the complex dynamics between green financing and the cost of debt across different contexts and sectors.

2.5. Hypothesis Development

The disclosure of information related to sustainability governance, which includes the existence of a sustainability committee, sustainability reports verified by independent external parties, and the provision of sustainability-related compensation, reflects the company’s awareness and commitment to its responsibility in dealing with sustainability issues (Farooq et al., 2021). Good sustainability governance practices can increase the effectiveness of sustainability management and disclosure transparency, which in turn affects a company’s ESG performance (Friske et al., 2023). Good sustainability governance practices combined with external parties’ verification of the information disclosed in the sustainability report can send positive signals to stakeholders, so sustainability-related governance is considered to play an important role in improving the company’s ESG performance, which reflects the success of the company’s overall management strategy and effectiveness (M. Li & Rasiah, 2024). If the existence of a sustainability committee is analyzed based on assumptions, it can ensure that sustainability issues are integrated into the company’s strategy and operations and increase transparency and accountability in ESG reporting. In addition, the sustainability committee moderates the impact of sustainability performance on a company’s market performance. The information in the sustainability report disclosed by the company cannot be guaranteed to be free of greenwashing (Elmghaamez et al., 2023). Therefore, verification and assurance by external parties are required to obtain an objective view of the credibility of disclosed information. Based on this foundation, the research hypothesis is formulated as follows:

H₁. 

Sustainability governance influences sustainability performance.

Before a lender provides funds, it assesses the feasibility of the company by examining, among other things, the performance and ESG risks that may arise from its operational activities (Adeneye et al., 2022). Companies with good ESG performance can influence risk perception, as the information presented can reduce information asymmetry (Shi et al., 2024) which has an impact on lowering the cost of debt as creditors value companies with good ESG performance. Companies with good ESG performance can manage risks effectively and are usually given legal leeway by regulators to reduce, but not eliminate, potential legal risks related to ESG that can later increase the company’s creditworthiness and allow creditors to grant lower interest rates (Abdul Razak et al., 2023). Based on the outlined foundation, the research hypothesis is formulated as follows:

H₂. 

Sustainability performance influences the cost of corporate debt.

3. Method

The research method used in this study was causal research, using a quantitative approach. Companies listed on the Indonesian Stock Exchange (IDX) for the period 2021–2023, totaling 3008 companies, were designated as the population. Complete data are only available for 216 companies, including 38 Indonesian, 66 Malaysian, 54 Singaporean, and 58 Thai companies. The researchers chose the period 2021–2023 as the implementation of the Task Force on Climate-related Financial Disclosure (TCFD) framework on the transparency of sustainability-related corporate governance disclosures is increasingly being focused on. The researchers did not conduct research in 2024 because the study was conducted in the first quarter of 2025, which means that the company’s annual report, sustainability report, and ESG performance data in 2024 were not fully available. The study covers the period from 2021 to 2023, which was selected because of the increasing availability and standardization of ESG disclosures and financial cost data in Southeast Asia during this time. This period also reflects the post-pandemic acceleration of sustainability reporting practices and stakeholder pressure on ESG integration (Abdul Rahman & Alsayegh, 2021). While the relatively short period limits the longitudinal inference, broad firm coverage across multiple countries ensures adequate variability for cross-sectional analysis.

Table 1. Operationalization of the Variables.

Variables	Indicators
Sustainability-related Governance (X1)	Sustainability-related governance will be measured using 3 (three) sub-indicators consisting of: Sustainability committee (X11) 0: The company does not have a sustainability committee under the board of commissioners 1: The company has a sustainability committee under the board of commissioners Sustainability reporting assurance (X12) 0: The company’s sustainability report is not verified by an independent external party. 1: The company’s sustainability report is verified by an independent external party. Sustainability compensation incentives (X13) 0: Company does not provide incentives related to sustainability. 1: The company provides incentives related to sustainability. The three components will have a maximum total value of 3 (three) and will be calculated using the average with the formula as follows:               $\mathrm{S}\mathrm{R}\mathrm{G}={\displaystyle \frac{\mathsf{\Sigma }}{3}}\times 100\mathrm{\%}$
Company Size (X2)	The determination of company size utilizes the natural logarithm (Ln) of the total asset value. This figure is derived from the Total Asset—Reported data available in the Refinitiv Eikon database.
Profitability (X3)	The return on asset (ROA) metric is utilized to determine profitability. This figure is derived by dividing net income by total assets. The net income value is obtained from the “Net Income After Taxes—Reported” category in Refinitiv Eikon, whilst the asset value is sourced from the “Total Asset—Reported” classification within the same system.
Sustainability Performance (Y)	The ESG scoring methodology employed by Refinitiv incorporates various sub-scores to evaluate a company’s sustainability practices. The overall ESG Score is derived from three fundamental pillars, offering a comprehensive assessment of an organization’s environmental, social, and governance performance: (1) Environmental (E) Score Evaluates a company’s environmental impact and sustainability efforts, including: Carbon emissions and climate change mitigation. Energy and water usage efficiency. Waste management and recycling. Biodiversity impact. Environmental innovation and clean technologies. (2) Social (S) Score Measures how well a company manages its social relationships with employees, customers, and communities: Workforce diversity and inclusion. Employee health and safety. Human rights policies. Product responsibility and data privacy. Community relations and corporate philanthropy. (3) Governance (G) Score Assesses a company’s corporate governance structure and ethical practices, including: Board diversity and independence. Executive compensation and alignment with shareholder interests. Business ethics, corruption, and bribery policies. Shareholder rights and transparency. Risk management and corporate social responsibility (CSR) integration.
Cost of Debt (Z)	The cost of debt is calculated from the weighted average cost of capital (WACC) debt taken from Refinitiv Eikon. The cost of debt variable used in this study is sourced from Refinitiv and represents a firm-specific estimate derived as part of Refinitiv’s standardized weighted average cost of capital (WACC) calculation. Refinitiv applies a hierarchical methodology to estimate the cost of debt, which prioritizes firm-level data but incorporates market-based adjustments where direct information is unavailable. Specifically, the platform determines the cost of debt using several approaches: Effective Interest Rate Method—When available, Refinitiv calculates the cost of debt using the ratio of interest expense to average total debt, which reflects the effective borrowing rate based on firm-specific financial disclosures. Yield-to-Maturity (YTM)—For firms with outstanding publicly traded bonds, Refinitiv uses the YTM of these instruments as a proxy for the firm’s cost of debt, which directly reflects market perceptions of credit risk. Credit Spread Adjustment—In cases where bond data are unavailable, Refinitiv estimates the cost of debt using a combination of credit spreads based on the firm’s credit rating and adjustments for prevailing risk-free rates (e.g., government bond yields), which are typically country-specific. Industry Benchmarking—For firms lacking sufficient firm-specific or market-traded debt data, Refinitiv employs industry-level benchmarks adjusted for capital structure characteristics to approximate the cost of debt. This methodology results in a cost of debt measure that is primarily firm-specific but may include implicit country-level influences through components such as risk-free rates, credit rating adjustments, and industry benchmarks. The WACC debt equation used by Refinitiv Eikon is as follows:            $\mathrm{WACC}=\left({\displaystyle \frac{E}{V}}\times R_e\right)+\left({\displaystyle \frac{D}{V}}\times R_d\times \left(1-T_c\right)\right)$ Where: WACC = Weighted Average Cost of Capital E = Market value of equity D = Market value of debt V = Total capital (E + D) Re = Cost of equity Rd = Cost of debt Tc = Corporate tax rate

illustrates the operationalization of the variables that describe each variable’s measurements.

Data analysis was carried out using the following descriptive and inference statistics:

• For descriptive analysis of the data, statistical measures, such as means, standard deviations, and maximum and minimum values, were calculated. Additional descriptive examinations were conducted by comparing averages across three categories: (a) yearly, to observe annual fluctuations in variable components; (b) by country, to identify any notable disparities in sustainability governance quality between nations; and (c) by industry, to detect significant variations in sustainability governance quality across sectors. The industry classification employed follows the Global Industry Classification Standard (GICS), a system that categorizes companies into 11 sectors based on their primary business activities: (i) energy, (ii) materials, (iii) industries, (iv) consumer discretionary, (v) consumer staples, (vi) healthcare, (vii) financials, (viii) information technology (IT), (ix) communication services, (x) utilities, and (xi) real estate.
• To determine whether the differences observed between years are statistically significant, this study uses the paired sample t-test for year-on-year comparisons, alongside the ANOVA test to examine differences between countries and industries.
• The research hypothesis is tested using a structural equation modeling (SEM) path analysis approach. This model, which is a further development of SEM, is used to analyze observable data (Grace, 2008). This study employs structural equation modeling (SEM) to analyze the relationships among three exogenous variables (sustainability governance, company size, and profitability) and two endogenous variables (sustainability performance and cost of debt). SEM is particularly well-suited for this research because it enables the simultaneous estimation of multiple interrelated equations, offering greater precision compared to traditional statistical techniques (Grace et al., 2015). Given that the data violate the assumption of multivariate normality, the robust maximum likelihood (RML) estimation method was utilized. RML is effective in providing reliable parameter estimates and model interpretations under such conditions. Prior to path analysis, the model’s goodness-of-fit is evaluated through three categories of fit indices: absolute, incremental, and parsimony. These categories encompass a range of indicators, and a greater number of satisfactory fit indices typically indicate that the model is well-specified and appropriate for further analysis. The final section presents the study’s path diagram and structural model, detailing the hypothesized relationships between the variables. Figure 1 illustrates these relationships, depicting the directional paths among governance mechanisms, sustainability performance, and the cost of debt.

Below are the structural equations:

Z = ρ_zyY + ρ_zx2X_{2 +} ρ_zx3X₃ + εZ

(1)

Y = ρ_Yx1X_{1 +} ρ_Yx2X₂ + ρ_Yx3X₃ +εY

(2)

where:

• ρ_Yx1X₁ = path coefficient from X₁ to Y.
• ρ_Yx2X₂ = path coefficient from X₂ to Y.
• ρ_Yx3X₃ = path coefficient from X₃ to Y.
• ρ_zx2X₂ = path coefficient from X₂ to Z.
• ρ_zx3X₃ = path coefficient from X₃ to Z.
• ρ_zyY = path coefficient from Y to Z.
• εY = error term Y.
• εZ = error term Z.

Hypothesis testing was conducted using a t-test at significance levels of α = 1%, 5%, and 10%. The research hypothesis is accepted (and the null hypothesis is rejected) if the t-value exceeds the critical values of 1.645 (10% level), 1.960 (5% level), or 2.576 (1% level), based on a two-tailed test.

A series of robustness tests were conducted to ensure the validity and reliability of the main findings. First, a sub-sample analysis by country (Indonesia, Malaysia, Singapore, and Thailand) was performed to examine whether the relationship between sustainability performance and cost of debt remains consistent across different institutional and financial contexts. This approach accounts for heterogeneity in credit market development, ESG regulatory frameworks, and sovereign risk. Additionally, sub-sample analyses were conducted using structural equation modeling (SEM) with path analysis, estimated separately for each country. This allowed for an examination of cross-country variations in structural relationships while maintaining consistent model specifications. The analysis employed the same structural equations as those outlined in Equations (1) and (2).

Second, the main equation model was re-estimated using a standardized cost of debt variable (Z-score) computed for each country. This transformation was applied to control for country-specific differences in borrowing conditions, such as variations in sovereign risk, interest rate regimes, and credit market maturity, thereby isolating firm-level variations in financing costs. Standardization was conducted by calculating the mean and standard deviation of the cost of debt within each country and then computing the Z-score for each firm as follows:

$$\mathrm{Z}\_\mathrm{C}\mathrm{o}{\mathrm{D}}_{\mathrm{i}\mathrm{c}}={\displaystyle \frac{\mathrm{C}\mathrm{o}{\mathrm{D}}_{\mathrm{i}\mathrm{c}}-{\mathsf{\mu }}_{\mathrm{c}}}{{\mathsf{\sigma }}_{\mathrm{c}}}}$$

(3)

where

• CoD_ic: Cost of debt for firm i in country c.
• μ_c: Mean cost of debt within country c.
• σ_c: Standard deviation of cost of debt in country c.

This adjustment ensures that the estimated associations reflect within-country differences among firms, rather than cross-country macroeconomic disparities. The re-estimated model using the Z-scored cost of debt provides a robustness check on whether the observed relationships hold consistently across countries with different financial systems.

Third, the ESG composite variable was disaggregated into three individual components: the presence of a sustainability committee, external sustainability assurance, and ESG-linked executive compensation. This approach was used to assess the distinct effects of each governance mechanism on sustainability performance and financing outcomes. By separating these components, the analysis avoids potential bias introduced by aggregating structurally different governance features into a single index. Each component is measured using a binary (dummy) variable indicating the presence (1) or absence (0) of disclosure regarding the respective governance mechanism. Due to the categorical nature of these indicators, the analysis was conducted using ordinary least squares (OLS) regression rather than structural equation modeling (SEM), as SEM typically requires continuous observed variables and does not directly accommodate binary independent variables without modification or transformation. The disaggregated governance variables are tested only in the first stage of the structural model, corresponding to Equation (1), which estimates the effect of governance mechanisms on sustainability performance. No estimation was conducted in relation to Equation (2) because there is no direct path from the governance variables (X₁) to the cost of debt (Z) in the proposed model. This limitation is acknowledged and the results are interpreted in light of the restricted scope of the estimation. The equation used is as follows:

Y = ρ_Yx11X₁₁ + ρ_Yx12X₁₂ + ρ_Yx13X₁₃ + ρ_Yx2X₂ + ρ_Yx3X₃ + εY

(4)

where:

• ρ_Yx11X₁ = path coefficient from X₁₁ to Y.
• ρ_Yx12X₂ = path coefficient from X₁₂ to Y.
• ρ_Yx13X₃ = path coefficient from X₁₃ to Y.
• ρ_Yx2X₂ = path coefficient from X₂ to Y.
• ρ_Yx3X₃ = path coefficient from X₃ to Y.
• εY = error term Y.

4. Results and Discussion

4.1. Results

4.1.1. Descriptives

Table 2. Descriptive statistics.

Variable	Year	Mean	St. Dev	Min	Max
X1	2021	0.565	0.271	0.000	1.000
	2022	0.622	0.278	0.000	1.000
	2023	0.667	0.270	0.000	1.000
X2	2021	21.893	1.841	17.720	26.950
	2022	21.918	1.846	17.690	27.040
	2023	21.958	1.847	17.770	27.050
X3	2021	0.055	0.091	−0.280	0.800
	2022	0.049	0.075	−0.340	0.510
	2023	0.038	0.056	−0.240	0.290
Y	2021	58.747	16.768	18.090	91.630
	2022	60.015	15.837	17.560	91.510
	2023	60.637	14.969	22.520	91.380
Z	2021	0.028	0.016	0.000	0.070
	2022	0.043	0.012	0.000	0.090
	2023	0.042	0.012	0.000	0.090

presents the results of the descriptive statistical tests. It can be seen in variable X1 (sustainability-related governance) that, over a period of three years, there was an increase in the average value of sustainability governance. However, the goodness is still struggling at a value of 0.565–0.667, which means that there is still a sufficiently large gap to optimize sustainability governance in the future.

Table 3. Sustainability Governance Component Descriptives.

Variable/Explanation	Year	Indonesia	Malaysia	Singapore	Thailand	Overall
Number of companies that have sustainability committee	2023	30	66	54	58	208
		78.95%	100.00%	100.00%	100.00%	96.30%
	2022	27	66	53	56	202
		71.05%	100.00%	98.15%	96.55%	93.52%
	2021	22	65	53	55	195
		57.89%	98.48%	98.15%	94.83%	90.28%
Number of companies that have sustainability reporting assurance	2023	20	39	24	48	131
		52.63%	59.09%	44.44%	82.76%	60.65%
	2022	19	32	22	45	118
		50.00%	48.48%	40.74%	77.59%	54.63%
	2021	18	28	20	44	110
		47.37%	42.42%	37.04%	75.86%	50.93%
Number of companies that provide sustainability-based compensation	2023	1	30	33	27	91
		2.63%	45.45%	61.11%	46.55%	42.13%
	2022	1	27	31	23	82
		2.63%	40.91%	57.41%	39.66%	37.96%
	2021	1	19	22	18	60
		2.63%	28.79%	40.74%	31.03%	27.78%

explains that, of the three components that constitute sustainability governance, the largest gap is in the sustainability-based compensation component. Only one Indonesian company has implemented a sustainability-based compensation policy. The conditions in other countries outside Indonesia are better, but no more than 50% of companies in each country have implemented sustainability-based compensation policies. Regarding the sustainability committee component, the level of companies in each country is high, approaching 100%, although there is still a considerable gap in Indonesia. In the sustainability reporting assurance component, the level of companies that have conducted sustainability assurance is not as high as that of companies with sustainability committees. This shows that the implementation of sustainability governance is only at the initial stage, namely the formation of supervisory organs, while the implementation of governance in real activities, such as sustainability assurance, has not yet been carried out (Corsi & Arru, 2020), and sustainability-based management control in the form of compensation is still low (Dharmayanti et al., 2023). There remains a need to improve the implementation of sustainability-based governance in these four countries.

The average value of the companies’ Y (sustainability performance) variable increased in the period 2021–2023, but the increase was also only at the level of 58 to 60. There has been no real improvement because the achievement of the value during these three years still shows a “sufficient” level of performance. Nevertheless, the decrease in the standard deviation shows a reduction in the distribution of companies between those with very large and very small sustainability performance scores. There was an increase in the Z (cost of debt) variable from 2021 to 2023, although the overall cost of debt increased from 2% to 4%. Southeast Asia is still considered a region with high financial risk, which results in a high cost of debt, even though in 2022 and 2023 there was an economic recovery after COVID-19 (Kakinuma, 2021).

In the control variables, there is an increase in the value of variable X2 (company size) from 2021 to 2023 and a stable standard deviation, which indicates that the companies’ assets are growing and indicates the companies’ stability. However, for variable X3 (profitability), the value of the variable decreases from 2021 to 2023. The standard deviation is higher than the average. This may indicate that, despite the stability of the companies that occurs along with the increase in company assets, developments in Southeast Asian countries also continue to cause high risks that cause the level of profitability to fall (Rao et al., 2020).

4.1.2. ANOVA

The results of the ANOVA are presented in

Table 4. ANOVA test result.

Variable/Explanation	3-Year Average Score
	X1	Y	Z
Per Country
Indonesia	0.410	58.843	0.037
Malaysia	0.626	60.899	0.041
Singapore	0.642	53.424	0.034
Thailand	0.719	65.454	0.041
Overall	0.618	59.800	0.038
ANOVA test score	31.677	17.262	8.527
Sig	0.000	0.000	0.000
Per Industry
Financials	0.626	63.623	0.035
Industrials	0.634	55.406	0.038
Real Estate	0.631	57.687	0.041
Communication Services	0.587	59.395	0.038
Consumer Staples	0.580	58.299	0.032
Information Technology	0.478	46.862	0.039
Consumer Discretionary	0.544	65.436	0.040
Utilities	0.645	56.114	0.043
Materials	0.677	67.561	0.039
Energy	0.695	69.141	0.040
Healthcare	0.625	63.209	0.041
Overall	0.618	59.800	0.038
ANOVA test score	1.861	7.425	2.704
Sig	0.048	0.000	0.000

. The analysis was conducted exclusively for three primary variables central to the study, with the objective of comparing sustainability governance and sustainability performance and their impact on the cost of debt in different countries and industries. The ANOVA results categorized by country show significant differences in the values of the main variables between countries. Notably, Thailand has the highest score for sustainability governance (X1), which is due to the mandate of the Stock Exchange of Thailand to implement sustainability since 2019 and is ahead of the other three countries in this study (Khunkaew et al., 2023). Conversely, Malaysia has the highest sustainability performance (Y) score due to strict sustainability performance regulations that require companies to report on their sustainability activities (Ngu & Amran, 2021). In terms of the variable cost of debt (Z), both Malaysia and Thailand have the highest costs compared with the other two countries.

The ANOVA results by industry also show significant differences in the values of the main variables between sectors. The materials and energy sectors had similar characteristics in terms of sustainability governance (X1) and performance (Y), with both sectors scoring the highest. These sectors are particularly sensitive to environmental issues and require stricter management and regulatory compliance to meet stakeholder expectations (Naeem et al., 2022). In terms of the cost of debt (Z), the real estate and healthcare sectors had the highest costs, with a score of 0.041. The combination of post-COVID, sector-specific vulnerability, and tighter credit conditions increased the cost of debt for real estate and healthcare companies (IMF, 2023).

4.1.3. SEM—Path Analysis

Before performing tests based on the structural equation modeling (SEM) path model, it is essential to perform a fit test for the SEM path analysis model. The results of the model fit test are presented in

Table 5. Goodness of fit test.

SEM Goodness of Fit Tests	Score	sig.	Criteria for Good Fit	Interpretation
Absolute Test
Chi-Square Test	0.090	0.340	sig ≥ 0.05	Good Fit
Root Mean Square Error of Approximation (RMSEA)	0.000	0.630	RMSEA < 0.05	Good Fit
Goodness of Fit Index (GFI)	1.000		GFI > 0.90	Good Fit
Incremental Test
Adjusted Goodness of Fit Index (AGFI)	0.990		AGFI > 0.9	Good Fit
Normed Fit Index (NFI)	1.000		NFI > 0.9	Good Fit
Comparative Fit Index (CFI)	1.000		CFI > 0.9	Good Fit
Incremental Fit Index (IFI)	1.000		IFI > 0.9	Good Fit
Parsimony Test
Parsimonious Goodness of Fit Index (PGFI)	0.067		PGFI Small	Good Fit
Parsimonious Normed Fit Index (PNFI)	0.1		PNFI Small	Good Fit
Akaike Information Criterion (AIC)	28.9		AIC Small	Good Fit
Consistent Akaike Information Criterion (AIC)	10.5.07		CAIC Small	Good Fit
Critical N	4612.58		Critical N > 200	Good Fit

. It is evident that all indicators of the absolute, incremental, and parsimony tests fulfil the criteria for a good fit, so the model passes the test and can proceed with further analysis.

Based on the SEM path model, the two equations were empirically tested. The results of the first equation indicate that sustainability governance (X1) has a positive influence on sustainability performance (Y). The coefficient value of 0.42 shows the strongest positive and significant effect (t = 12.38) of sustainability governance on sustainability performance. In addition, the control variables, namely, company size (X2) and profitability (X3), also show a positive influence on sustainability performance (Y). The R² value of the model is 31%, which supports Hypothesis 1.

The analysis of the second equation shows that sustainability performance (Y) has a positive influence on the company’s cost of debt (Z). The coefficient of 0.15 shows a small but statistically significant positive effect (t = 3.26) of sustainability performance on the cost of debt. Conversely, the control variables of company size and profitability negatively affect the cost of debt. The R² value of the model is 3%, which means that the model explains 3% of the variance in the cost of debt, thus supporting Hypothesis 2. This result is noteworthy, as it suggests that sound financial performance, as indicated by the control variables, is associated with a reduction in the cost of debt, while improving sustainability performance appears to increase the cost of debt.

Table 6. SEM—Path Analysis results.

Path Coefficient	Coefficient Score	R2 Model	t-Test	Hypothesis Testing Results
PYX1	0.42	0.31	12.38	Accepted
PYX2	0.23		6.74
PYX3	0.15		4.77
εY	0.69
PZY	0.15	0.03	3.26	Accepted
PzX2	−0.11		−2.35
PzX3	−0.13		−3.36
εZ	0.97

presents the results.

4.1.4. Robustness Test

To assess the consistency of the structural relationships across different countries, a sub-sample analysis was conducted using SEM path analysis for each country, as shown in

Table 7. Sub-sample SEM—Path Analysis results.

Country	Indonesia			Malaysia			Singapore			Thailand
Path Coefficient	Coefficient Score	R2 Model	t-Test	Coefficient Score	R2 Model	t-Test	Coefficient Score	R2 Model	t-Test	Coefficient Score	R2 Model	t-Test
PYX1	0.49	0.48	6.69	0.38	0.37	7.22	0.50	0.37	6.79	0.23	0.24	3.17
PYX2	0.25		3.84	0.37		6.88	0.17		2.55	0.32		3.95
PYX3	0.20		3.25	0.21		3.17	−0.07		−1.48	0.00		0.05
εY	0.52			0.63			0.63			0.76
PZY	0.20	0.06	0.88	−0.10	0.01	−1.23	0.19	0.09	2.1	0.15	0.16	1.81
PzX2	−0.01		−0.36	0.02		0.22	−0.31		−3.31	0.17		2.14
PzX3	−0.23		−2.37	0.01		0.12	−0.16		−2.51	−0.21		−3.06
εZ	0.94			0.99			0.91			0.84

. The robustness test through sub-sample analysis by country reveals that the positive relationship between ESG mechanisms and sustainability performance is statistically significant across all four countries—Indonesia, Malaysia, Singapore, and Thailand—at the 1% significance level (α = 0.01), indicating strong and consistent support for the first hypothesis (H1). However, the effect of sustainability performance on the cost of debt varies across the national context. This relationship is statistically significant in Singapore at the 5% level, Thailand at the 10% level, and in the pooled sample at the 1% level but remains insignificant in Indonesia and Malaysia. These findings suggest that the influence of ESG performance on financing costs may be more evident in countries with greater ESG integration or market responsiveness to sustainability disclosure. For firm-level control variables, profitability demonstrates a consistent and significant negative effect on the cost of debt in Indonesia, Singapore, and Thailand (at the 5% and 1% significance levels), while firm size shows a significant relationship only in Singapore and Thailand, although with opposite directions of influence. The relatively low R² values in the cost of debt models (ranging from 0.01 to 0.16) across countries indicate that other macroeconomic or institutional factors likely influence financing costs, supporting the need for a cautious interpretation of the results related to the second hypothesis (H2).

To further test the robustness of the model, a re-estimation was conducted using a standardized (Z-score) cost of debt variable calculated for each country. The results, presented in

Table 8. Re-estimation model using SEM Path Analysis results.

Path Coefficient	Original Model			Z-Score Model
	Coefficient Score	R2 Model	t-Test	Coefficient Score	R2 Model	t-Test
PYX1	0.42	0.31	12.38	0.42	0.31	12.38
PYX2	0.23		6.74	0.23		6.74
PYX3	0.15		4.77	0.15		4.77
εY	0.69			0.69
PZY	0.15	0.03	3.26	0.05	0.03	1.01
PzX2	−0.11		−2.35	−0.03		−0.56
PzX3	−0.13		−3.36	−0.13		−3.3
εZ	0.97			0.97

, show that the structural relationships between ESG mechanisms and sustainability performance remain unchanged, with all path coefficients and t-values for governance components remaining statistically significant at the 1% level. This result confirms the robustness of the first structural equation. However, the relationship between sustainability performance and the cost of debt, which was statistically significant in the original model at the 1% level (t = 3.26), becomes statistically insignificant in the standardized model (t = 1.01). This suggests that the original relationship may have been driven by between-country differences in debt pricing, rather than by within-country firm-level variation. The effect of profitability on the cost of debt remains consistently significant and negative across both models, whereas the previously significant effect of firm size becomes non-significant in the Z-score model. Notably, the R² values remained unchanged, indicating that standardizing the dependent variable does not affect the model’s explanatory power. These findings underscore the importance of accounting for country-specific financial conditions when interpreting the relationship between sustainability and financing outcomes.

To enhance interpretive clarity, the ESG composite is disaggregated into three distinct components: the existence of a sustainability committee (X11), external sustainability assurance (X12), and ESG-linked executive compensation (X13). The regression results in

Table 9. Sustainability governance disaggregation regression result.

Country	Indonesia			Malaysia			Singapore			Thailand			All Countries
Variable	Coefficient	R2 Model	t-Test	Coefficient	R2 Model	t-Test	Coefficient	R2 Model	t-Test	Coefficient	R2 Model	t-Test	Coefficient	R2 Model	t-Test
C	−27.23	0.49	−1.48	−47.56	0.41	−5.12	−10.69	0.37	−0.72	3.85	0.24	0.32	−4.35	0.34	−0.63
X11	16.60		4.88	39.25		22.60	26.19		15.12	4.58		0.97	13.53		5.22
X12	5.86		2.09	11.80		6.58	11.19		4.62	5.51		2.39	11.72		10.60
X13	7.07		2.43	2.67		1.50	6.96		3.47	3.82		2.00	2.89		2.68
X2	3.12		3.82	2.88		6.34	1.37		2.04	2.32		3.83	1.95		6.36
X3	34.88		2.56	30.38		2.84	−27.07		−1.89	0.89		0.05	24.79		3.92

reveal that the significance and strength of these components vary across countries. In Indonesia and Singapore, all three governance mechanisms showed statistically significant and positive relationships with sustainability performance, indicating a well-integrated governance structure. In Malaysia, only the sustainability committee and assurance are significant, while ESG-linked compensation is not, suggesting that the structural and procedural elements are more influential. Conversely, in Thailand, assurance and compensation contribute significantly, whereas the committee variable lacks significance. For the pooled sample of all countries, all three governance variables remained significant, with external assurance demonstrating the strongest effect. These findings underscore the importance of disaggregating ESG elements, as they exhibit differential impacts depending on the national context and governance maturity and highlight that committee presence and external assurance tend to play more consistent roles in enhancing sustainability performance across the ASEAN region.

4.2. Discussions

This study has several interesting findings. First, this research demonstrates that sustainability governance in companies is still at the conceptual level and the formation of bodies but has not yet been integrated into management control and monitoring of sustainability performance. This is demonstrated by the fact that many companies have sustainability committees, but only a few have conducted sustainability audits, and even fewer link management compensation to the fulfillment of sustainability performance. The research findings suggest that, while many companies have established sustainability governance structures, such as sustainability committees, there is a gap between the conceptual implementation and practical integration of sustainability into management control and performance monitoring. The establishment of sustainability committees may be driven more by external pressure and stakeholder expectations than by genuine commitment to integrate sustainability. There is a growing awareness among companies to integrate sustainability into their corporate governance but also great heterogeneity in their corporate behavior and much room for improvement (Dicuonzo et al., 2022). This suggests that some companies may only superficially implement sustainable corporate governance structures to fulfill societal expectations without fully integrating sustainability into their core businesses. Second, the lack of sustainability audits and performance-related remuneration may be due to the complexity of measuring and quantifying sustainability performance. There is a need to standardize the development of metrics and targets to facilitate performance comparison (Tang, 2023). Without clear, standardized metrics, companies may struggle to effectively review their sustainability efforts or link them to executive compensation. Sustainable corporate governance significantly improves environmental performance, but this requires a comprehensive approach that goes beyond simply establishing committees (Velte, 2023). To close this gap, companies must go beyond symbolic gestures and integrate sustainability more deeply into their governance and operational practices.

Second, the results of the hypothesis tests prove that good sustainability governance can promote optimal sustainability performance. This is due to the fact that good sustainability governance can promote the achievement of optimal sustainability performance for several reasons: first, effective sustainability governance structures, such as sustainability committees, play a critical role in monitoring and promoting environmental, social, and governance (ESG) initiatives in organizations. These committees can positively influence the relationship between ESG performance and environmental innovation and promote a culture of sustainability and innovation (Alodat et al., 2025). Through targeted oversight, sustainability committees ensure that sustainability goals are integrated into a company’s strategy and operations. Second, specific governance mechanisms such as board characteristics can significantly influence ESG outcomes. For example, more board meetings and a higher proportion of independent board members correlate with better ESG performance (Najaf et al., 2024). This finding suggests that more frequent board involvement and independent oversight lead to better sustainability practices and outcomes.

Third, contrary to popular beliefs, the results of this study show that high sustainability performance leads to a high cost of debt. The finding that high sustainability performance leads to a higher cost of debt contradicts the widespread assumption that environmentally and socially responsible companies benefit from lower borrowing costs. This counterintuitive result can be explained by several factors. First, investment in sustainability initiatives often requires significant upfront costs and long-term commitments, which can increase a company’s financial risk in the short term. Creditors may view these investments as potentially impairing a company’s ability to service its debt, leading to higher interest rates (Gonçalves et al., 2022). In addition, companies with strong ESG performance may be more likely to take on debt to finance their sustainability projects, thereby increasing their leverage and perceived risk. Interestingly, this relationship varies across different contexts (Aleknevičienė & Stralkutė, 2023). This suggests that the impact of sustainability performance on the cost of debt may depend on factors such as regional norms, investor behavior, and market perceptions. Southeast Asia faces a lack of standardization and common definitions, significantly hampering green finance in the region. The lack of international standards and a common definition of green finance hinders the effective implementation and comparison of green bond initiatives across Southeast Asian countries (Bogacheva & Smorodinov, 2017). Green bond policies in Southeast Asia have been effective in promoting green bond issuance; however, they do not necessarily lead to more renewable energy and energy efficiency projects in the region. Proceeds from green bonds can be used to finance projects abroad or refine previous loans, potentially limiting their impact on local green investments (Azhgaliyeva et al., 2019).

Fourth, the robustness tests yield important insights into the contextual variability of the relationship between sustainability performance and cost of debt. The sub-sample analysis reveals that this relationship is statistically significant in Singapore and Thailand but not in Indonesia or Malaysia. Singapore’s advanced capital markets, strong regulatory enforcement by the Monetary Authority of Singapore (MAS), and widespread ESG integration likely enhance the visibility and pricing relevance of sustainability information (Singhania & Saini, 2021). In Thailand, efforts by the Stock Exchange of Thailand (SET) to mandate ESG disclosure and promote awareness among institutional investors appear to have enabled ESG performance to influence credit risk assessments, albeit to a lesser degree (Suttipun, 2023). By contrast, Indonesia and Malaysia displayed no significant effects. This may be due to less mature ESG regulatory enforcement, the voluntary or evolving nature of disclosure requirements (e.g., POJK No. 51/2017 and Bursa Malaysia regulations), and bank-dominated credit systems, where relationship-based lending and financial metrics outweigh ESG considerations (Nathania & Ekawati, 2024). The second robustness test, involving a standardized (Z-score) cost of debt variable, reveals that the initial significance disappears after controlling for country-level variations. This finding suggests that the original relationship may have been influenced more by differences in national borrowing environments than by firm-level ESG dynamics alone, underscoring the need to account for macrofinancial heterogeneity in multicountry studies. Finally, disaggregating the ESG composite into three components—sustainability committee, external assurance, and ESG-linked executive compensation—shows differentiated effects by country. In Indonesia, all three mechanisms are significant, reflecting a broad and credible governance approach under recent regulatory pressures. In Malaysia, structural and procedural elements drive sustainability performance, whereas compensation-based incentives remain underutilized (Tran et al., 2021). Singapore showed consistent significance across all components, supported by its mature governance practices and global ESG alignment. In Thailand, only procedural and incentive-based mechanisms are significant, suggesting that formal committees may exist but play a more symbolic role (Sekarlangit & Wardhani, 2021).

5. Conclusions

This study sheds light on several critical aspects of sustainability governance and its implications for corporate performance. First, it reveals a significant gap between the conceptual adoption of sustainability governance structures and their practical integration into management controls and performance oversight. Although many companies have established sustainability committees, there is a lack of concrete action in terms of sustainability audits and performance-linked compensation. This suggests a superficial approach to sustainability governance, potentially driven by external pressures rather than genuine commitment. Second, this study confirms that good sustainability governance can encourage optimal sustainability performance. Effective governance structures, such as sustainability committees and independent board oversight, play a crucial role in driving environmental, social, and governance (ESG) initiatives and fostering a culture of sustainability and innovation within organizations. Contrary to popular belief, this research finds that high sustainability performance leads to a higher cost of debt. This counterintuitive result can be attributed to the significant upfront costs and long-term commitments associated with sustainability initiatives that may increase a firm’s perceived financial risk in the short term. However, this relationship may vary across different contexts, suggesting a need for further research in this area. This study highlights the challenges faced in promoting green finance in Southeast Asia. The lack of standardization and common definitions for green finance poses significant obstacles to the effective implementation and comparison of green-bond initiatives across the region. While green-bond policies have been effective in promoting issuance, they do not necessarily translate into increased local renewable energy and energy efficiency projects. In conclusion, this study underscores the complex relationship between sustainability governance, performance, and financial outcomes. This emphasizes the need for companies to move beyond symbolic gestures and integrate sustainability more deeply into their governance and operational practices. Future research should focus on developing standardized metrics for sustainability performance and exploring the contextual factors that influence the relationship between sustainability initiatives and financial outcomes.

While this study offers valuable insights into the relationship between ESG, sustainability performance, and cost of debt across ASEAN countries, several limitations should be acknowledged. First, the three-year observation period (2021–2023) limits the ability to draw long-term causal inferences. Future research should extend the timeframe to allow for longitudinal analysis and better address potential endogeneity. Second, the sub-sample analysis revealed country-specific differences, with significant effects only found in Singapore and Thailand. This underscores the influence of institutional contexts such as regulatory maturity and credit market development on ESG-financing dynamics. Future studies should incorporate country-level control variables to better isolate the firm-level effects. Third, the significance of the results diminished when using the standardized (Z-score) cost of debt, indicating that cross-country variation may partially explain the original findings. Employing multilevel or hierarchical models could enhance the robustness in future work. Fourth, disaggregating the ESG composite into structural, procedural, and incentive-based components reveals variations in their effectiveness across countries. However, because of the binary nature of these indicators, the analysis was limited to OLS estimations. Future studies should consider generalized structural models or continuous measures to capture governance effects more flexibly. Third, while the study offers valuable insights, the potential for endogeneity between sustainability performance and cost of debt cannot be fully ruled out. Firms with lower financing costs may be more capable of investing in ESG activities or unobserved factors such as managerial quality or stakeholder pressure may influence both variables simultaneously. Although robustness checks and control variables mitigate some concerns, future research should apply instrumental variable techniques or dynamic panel models to better establish causality. Finally, while key control variables are included, the potential endogeneity between ESG performance and financing outcomes remains a concern. Future research should consider instrumental variables and dynamic panel methods to address this issue more rigorously.