The Effect of ESG on Working Capital: Two for the Price of One
Leon-Castro, Delia; Lopez-Iturriaga, Felix; San-Martin, Pablo
Year: 2025 Volume: 75 Issue: 3 Pages: 343-370
Abstract: We examine the relationship between environmental, social, and governance (ESG) scores and working capital management in 4,212 traded firms across 65 countries (2010–2023), emphasizing the role of financial constraints. We find that higher ESG scores, mainly driven by environmental and social pillars, are associated with lower working capital requirements. When disaggregating the cash conversion cycle components, we observe that ESG-strong firms collect payments from customers more quickly and secure extended payment terms from suppliers, reflecting trust-based relationships and more efficient liquidity strategies. ESG performance is associated with a mitigation of the impact of financial constraints, suggesting that sustainability practices enhance financing conditions. These results are robust to propensity score matching and industry-adjusted specifications. Our findings highlight ESG as a strategic lever for improving liquidity efficiency and managing capital-market friction through enhanced stakeholder engagement.
JEL classification: G30, G31, G32
Keywords: ESG, working capital management, financial constraints, cash conversion cycle, working capital requirements
DOI: https://doi.org/10.32065/CJEF.2025.03.04
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