ESG, THE 2008 GLOBAL FINANCIAL CRISIS AND ACCESS TO EXTERNAL FINANCE BY CANADIAN FIRMS by Gabriel Nomotsu Teye-Ali M.Phil., University of Ghana, 2016 B.Sc., University of Ghana, 2013 THESIS SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF SCIENCE IN BUSINESS ADMINISTRATION UNIVERSITY OF NORTHERN BRITISH COLUMBIA April 2025 © Gabriel Nomotsu Teye-Ali, 2025 Declaration of Original and Data Authenticity This thesis is a presentation of my original research work under the direct supervision of Dr. Leandro Freylejer of the Univeristy of Northern British Columbia (UNBC). Wherever contributions of other researchers are involved, I make every effort to indicate that clearly, with due acknowledgement of collaborative research and discussions. I affirm that the data reported herein are authentic and accurate. This thesis has not been submitted to any other academic institution for the award of any degree or diploma. ii Abstract This study examines the impact of restricted access to credit on the Environmental, Social, and Governance (ESG) performance of Canadian firms, using the 2008 financial crisis as a stress test. The analysis is guided by two competing perspectives: the Resource Constraint View and the Strategic Value View. I employ the Difference-in-Differences (DiD) methodology to assess how financial constraints resulting from the crisis influenced ESG performance. My findings reveal a significant negative impact on the Environmental pillar, confirming that financial constraints led firms to deprioritise environmental commitments. However, the effects on the combined ESG score, as well as the Social and Governance pillars, are less robust, indicating that the relationship between credit access and these dimensions is more complex. These results align with the Resource Constraint View, suggesting that firms prioritise financial stability over sustainability commitments during periods of economic distress. Further analysis shows that Return on Assets is positively associated with ESG and Social performance, indicating that financially healthier firms are better able to maintain sustainability efforts. Firm Size is positively correlated with all ESG dimensions, highlighting that larger firms are more capable of investing in ESG initiatives. Additionally, the presence of an Audit Board Committee is strongly linked to higher Governance scores, underscoring the role of effective oversight in fostering strong ESG performance. This study emphasises the critical role of access to external credit in shaping ESG outcomes, particularly in the environmental domain during economic downturns. The findings highlight the need for supportive financial environments to sustain corporate sustainability efforts. iii Table of Contents Declaration of Original and Data Authenticity ........................................................ ii Abstract................................................................................................................ iii Table of Contents ................................................................................................. iv List of Tables......................................................................................................... vi List of Figures ...................................................................................................... vii Acknowledgement .............................................................................................. viii Dedication ............................................................................................................ ix Chapter One: Introduction ..................................................................................... 1 1.1 Background of the study ....................................................................................1 1.2 Problem statement and motivation ....................................................................7 1.3 Research Objectives ........................................................................................ 11 1.4 Significance of the research ............................................................................. 12 1.5 Research Scope and Limitations ...................................................................... 12 1.6 Contributions to research ................................................................................ 13 1.6.1 1.6.2 1.6.3 1.6.4 1.6.5 1.7 Conceptual Contributions ................................................................................................. 13 Practical Implications ....................................................................................................... 14 Methodological Contributions ........................................................................................... 14 Contextual Contribution.................................................................................................... 15 Overall Significance .......................................................................................................... 15 Organisation of the Study ................................................................................. 16 Chapter Two: Literature Review ........................................................................... 17 2.1 Introduction .................................................................................................... 17 2.2 Theoretical Frameworks Connecting ESG and Access to Credit ........................ 17 2.2.1 2.2.2 2.2.3 2.2.4 2.3 2.3.1 2.3.2 2.3.3 2.3.4 2.4 2.4.1 2.4.2 2.4.3 2.4.4 2.4.5 Stakeholder Theory ........................................................................................................... 17 Signaling Theory ................................................................................................................ 20 Agency Theory ................................................................................................................... 23 Comparison of Theories .................................................................................................... 25 Empirical Review ............................................................................................. 26 Introduction to ESG in Corporate Finance ......................................................................... 27 ESG and access to credit .................................................................................................. 28 ESG Ratings and Creditworthiness .................................................................................... 30 ESG Disclosure and Reporting Challenges ........................................................................ 32 ESG adoption in Canada and the 2008 Global Financial Crisis ........................... 35 ESG Adoption in Canada. .................................................................................................. 36 Regulatory and Market Drivers........................................................................................... 36 Post-Crisis Developments................................................................................................. 37 Challenges in ESG Implementation in Canada .................................................................. 39 Contribution to Literature .................................................................................................. 39 Chapter Three: Data And Methodology ................................................................. 41 3.1 Introduction .................................................................................................... 41 iv 3.2 Sources of Data .............................................................................................. 43 3.3 Variable Description and Measurement ........................................................... 44 3.3.1 3.3.2 3.3.3 ESG Variables ................................................................................................................... 44 The KZ Index ...................................................................................................................... 45 Other Control Variable ...................................................................................................... 47 3.4 Descriptive Statistics....................................................................................... 53 3.5 Evolution of ESG and Financial Constraints: A Trend Analysis ........................... 56 3.5.1 3.5.2 3.5.3 3.6 3.6.1 3.6.2 3.6.3 ESG Trend Analysis ........................................................................................................... 56 Financial constraint and the KZ index ................................................................................ 59 Comparison between the ESG and financial constraints over the years. ........................... 61 Empirical Strategy ........................................................................................... 62 Identification Strategy ....................................................................................................... 63 Model Specification .......................................................................................................... 63 The parallel trend assumption and robustness of the DiD framework ................................ 65 Chapter Four: Results, Findings And Discussions ................................................ 67 4.1 Introduction .................................................................................................... 67 4.2 Event Study and Placebo Test .............................................................................. 67 4.3 Regression Results and Discussions....................................................................... 75 4.3.1 4.3.2 4.3.3 4.3.4 Discussion of Regression Results...................................................................................... 75 Impact of Restricted Credit Access on ESG Performance .................................................. 75 Differential Effects on Environmental, Social, and Governance (ESG) Pillars ..................... 78 Control Variables and other Governance factors ............................................................... 79 Chapter Five: Summary, Conclusion and Recommendations ............................... 83 5.1 Introduction .................................................................................................... 83 5.2 Summary ......................................................................................................... 83 5.3 Recommendations .......................................................................................... 84 5.4 Thesis Contribution ......................................................................................... 86 5.5 Limitations and direction for future research .................................................... 87 References .......................................................................................................... 89 Appendix ........................................................................................................... 105 v List of Tables Table 1: Descriptive Statistics ................................................................................................. 53 Table 2: Placebo test ................................................................................................................ 73 Table 3: DiD Regression results .............................................................................................. 75 Table 4: Average Total Assets for Economic Sectors (2004-2014) ...................................... 110 Table 5: Summary of Non-Missing ESG Observations Per Firm.......................................... 110 Table 6: DiD regression with no missing data for environmental score ................................ 111 vi List of Figures Figure 1: GDP Growth Rate in Canada ..................................................................................... 6 Figure 2: Average ESG Score in Canada ................................................................................. 57 Figure 3: Average ESG Pillar Scores....................................................................................... 59 Figure 4: Average KZ Index Over Time.................................................................................. 60 Figure 5: Event Study for Combined ESG .............................................................................. 68 Figure 6: Event Study for Environmental Pillar Score ............................................................ 70 Figure 7: Event Study for Social Pillar Score .......................................................................... 71 Figure 8: Event Study for Governance Pillar Score................................................................. 72 Figure 9: Average ESG Score: Treated vs Control Group .................................................... 105 Figure 10: Average Environmental Pillar Score: Treated vs Control Groups ....................... 106 Figure 11: Average Social Pillar Score: Treated vs Control Groups ..................................... 107 Figure 12: Average Governance Pillar Score: Treated vs Control Groups ........................... 108 Figure 13: Average KZ Index: Treated vs Control Groups ................................................... 109 vii Acknowledgement First and foremost, I give all glory and thanks to God Almighty, whose grace and guidance have sustained me throughout this journey. Without His wisdom and strength, this achievement would not have been possible. I extend my deepest gratitude to my Supervisor, Dr. Leandro Freylejer, for his invaluable guidance, patience, and unwavering support throughout this research. My sincere appreciation also goes to my Committee members, Dr. Chengbo Fu and Dr. Komla Avoumatsodo, for their expertise, insightful feedback, encouragement, and constructive contributions. I am profoundly grateful to the leadership and staff of Stratcon Energy & Trading Ltd for their unwavering support and understanding over the past few years. Their flexibility and encouragement have been instrumental in balancing my professional responsibilities with this academic pursuit. Special thanks to Ms. Christiana Opare, Mr. Prince Amatey Korley, Mr. Divine Puplampu, Ms. Rosbette Maame Yeboah, Mr. George Amofa-Amoako, Dr. Emmanuel Quarshie, and Dr. Sylvester Senyo Horvey for their unflinching support during my time at UNBC. To my beloved wife, Dr. (Mrs.) Abigail Bimpeh Teye-Ali, I owe an immeasurable debt of gratitude. Your sacrifices, patience, and unwavering support have kept our family strong and grounded during my time away for my studies. This achievement is as much yours as it is mine. viii Dedication I dedicate this work to my son, Jayden Kabutey Teye-Ali. You are my greatest inspiration and the light of my life. May this achievement remind you that with faith, hard work, and determination, no dream is too big to achieve. Always aim high, my son, and never stop believing in yourself. ix Chapter One: Introduction 1.1 Background of the study Globally, the demand by stakeholders for companies to conduct business sustainably and disclose non-financial information beyond their financial statements has taken centre stage since 2004. For firms to take responsible actions against the rising environmental and social issues across the globe, the then United Nations (UN) Secretary General, Kofi Annan, invited 18 leading financial institutions to come up with strategies and recommendations that would ensure that companies compete fairly in making financial gains and not at the expense of destruction to their catchment areas. The report by these financial institutions dotted across nine countries birthed the term Environmental, Social, and Governance (ESG) in the 2004 Global Compact Report titled