The impact of corporate sustainability on capital structure: An application on BRICS-T countries

Today, corporate sustainability plays a key role in the long-term success and competitive advantage of firms, and environmental, social and governance (ESG) performance stands out as a fundamental criterion in both meeting stakeholder expectations and guiding financial decision-making processes. In this context, it can be argued that ESG performance will have a significant impact not only on firm reputation and performance but also on financial decision-making processes. This study aims to examine the impact of environmental, social, governance (ESG) and overall ESG performance on capital structure and the moderating variable effect of the COVID-19 pandemic on this relationship. For this purpose, a panel data analysis was conducted on a total of 7361 firm-year observations using the data of firms operating outside the financial sector in BRICS-T countries (Brazil, Russia, India, China, South Africa and Turkey) for the years 2011-2021. According to the results of the analysis where total debt ratio, long-term debt ratio and short-term debt ratio are included as dependent variables, social performance score and overall ESG score have a negative effect on total debt ratio; environmental performance score, social performance score and overall ESG score have a negative effect on long-term debt ratio; and social performance score and overall ESG score have a positive effect on short-term debt ratio. Moreover, it is concluded that these effects diverged during the Covid-19 pandemic period and the negative effect of environmental performance score, social performance score and overall ESG score on total debt ratio turned positive, while the positive effect of ESG components on short-term debt ratio became more pronounced during the pandemic period. These findings show that as environmental, social and overall ESG performance increases, firms tend to have a lower risk profile and adopt a healthier financial structure by reducing their total debt and long-term debt ratios, while firms increase their short-term debt ratios by utilizing the advantages provided by high ESG performance. It has been concluded that during the COVID-19 pandemic, the emergence of urgent financing needs led companies to increase their debt ratios.