The relationship between ESG, financial performance, and cost of debt: the role of independent assurance

Does it take independent assurance for lenders to reward sustainability disclosure?

Darsono Darsono, Dwi Ratmono, Abas Tujori, and Tiara Yuni Clarisa study how independent assurance shapes sustainability disclosure, financial performance, and the cost of debt in their paper "The relationship between ESG, financial performance, and cost of debt: the role of independent assurance".

They analyse 253 firm-year observations from 93 non-financial companies listed on the Indonesian stock exchange between 2020 and 2022.

Their main conclusions include:

• Sustainability disclosure averages around 65% of a full GRI reporting, which the authors consider moderate. The governance dimension leads, followed by environmental and social disclosure.
• Assurance remains rare, used in only about 21% of the firm-year observations, with just over half of them handled by a public accounting firm and the remainder by specialist providers.
• Stronger disclosure goes with higher return on assets, which confirms transparency on sustainability aligns with profitability rather than detracting from it.
• Stronger disclosure is linked to a lower cost of debt, which shows lenders treat sustainability reporting as a signal of reduced risk when setting interest rates.
• The decrease in cost of debt tied to sustainability disclosure is larger for firms whose sustainability reports carried external assurance.
• Independent assurance does not strengthen the sustainability and financial performance relationship, which holds whether or not an external party verified the disclosures.

This article shows consumers and investors do not need assurance to integrate a company's sustainability perception into their sustainability analyses, but assurance does lower borrowing costs.

Commissioning independent assurance can convert sustainability disclosure into a measurable funding-cost advantage where it is voluntary and uptake is low.

It suggests EU regulators are targeting the right lever with the CSRD, where limited assurance is now mandatory, even though disclosure requirements have been dramatically reduced.

The sample however only covers non-financial firms on a single emerging market exchange across three pandemic-affected years, and the cross-sectional design captures association rather than causation.

ESG is measured purely from sustainability-report disclosure, so it reflects reporting quality rather than underlying sustainability performance.