Unpacking ESG and firm performance: Evidence from an emerging market and the mediating role of cost of debt

Abstract

This study investigates the relationship between environmental, social, and governance (ESG) disclosure and firm profitability, while examining the mediating role of the cost of debt in Vietnam, a transitional emerging market. Using panel data from non-financial listed firms and fixed-effects regressions with Driscoll-Kraay standard errors, we disaggregate ESG into its three core dimensions to uncover heterogeneous effects. The findings reveal that social and governance disclosures are positively and significantly associated with return on assets (ROA), while environmental disclosure shows no significant effect. Moreover, cost of debt partially mediates the relationship between social and governance disclosures and firm profitability, suggesting that enhanced stakeholder trust and reduced risk perceptions lower borrowing costs (El Ghoul et al., 2011) and improve performance. The mediating role is not observed for environmental initiatives. This study makes three contributions. First, it extends the ESG-performance literature by identifying cost of debt as a transmission channel through which specific ESG pillars affect firm outcomes (Intezar et al., 2026). Second, it underscores the importance of disaggregating ESG dimensions, as their financial relevance varies. Third, it contributes to stakeholder (Freeman, 1984) and capital structure theories by contextualizing the analysis in an emerging market with voluntary ESG practices and evolving regulation.