Sustainability practices in Latin America and Mexico: the ESG impact on financial indicators in public companies

Abstract

This thesis explores the interaction of ESG and diverse financial indicators in Latin American public companies using advanced econometric tools. The first chapter analyzes the relationship between ESG performance and cost of capital in a panel data regression of a sample with Argentinean, Brazilian, Chilean, Colombian, Mexican, and Peruvian public companies. The panel data regressions focus on 181 entities from 2015 to 2023. Moreover, they assess the combined and pillar scores as independent variables to identify the dynamics of the ESG dimensions with the different capital sources. The regression estimations with economic-sector and year fixed effects highlight that ESG performance reduce the cost of capital and its stock component. Specifically, environmental and social categories drive lower costs of both. The second chapter studies the interaction of ESG score disclosures with firm characteristics and financial performance in a broader sample comprising 498 Latin American public companies from 2016 to 2023. The model applied is a pooled logistic regression with economic-sector and country fixed effects. The findings reveal that a higher strategic ownership concentration tends to reduce the probability for a good ESG and its pillar score disclosure in Latin American firms. Moreover, it identifies insights into regional dynamics such as public companies with a larger size, intensive fixed assets, leverage and liquidity tend to have better ESG and its pillar scores disclosure. In the relationship with financial performance, the combined and by pillar scores disclosure positively influence the Tobin’s Q probability of being greater than one in the next year, creating firm value. The last chapter focuses on Mexico, characterized by its nearshoring and abundant natural resources opportunities, to identify the impact of ESG disclosure on firm value. In a dataset of 89 Mexican public companies from 2016 to 2023, a pooled logistic regression with economic-sector fixed effects shows that ESG and its pillar disclosure increases the probability of having a Tobin’s Q greater than one in the next year. This thesis contributes to filling the research gap with a large company representation and identifies insights of sustainable practices into emerging markets dynamics for long-term value creation: lower cost of capital and cost of equity in Latin America, and higher firm value in the region and, particularly, in Mexico.