ESG, the 2008 global financial crisis and access to external finance by Canadian firms

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.