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The Effect of ESG on Working Capital: Two for the Price of One

Author

Listed:
  • Delia Leon-Castro

    (Facultad de Ciencias Economicas y Administrativas, Universidad Catolica de la Santisima Concepcion, Concepcion, Chile)

  • Pablo San-Martin

    (Facultad de Ciencias Economicas y Administrativas, Universidad Catolica de la Santisima Concepcion, Concepcion, Chile)

  • Felix Lopez-Iturriaga

    (Facultad de Ciencias Economicas y Empresariales, Universidad de Valladolid, Valladolid, Espana)

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.

Suggested Citation

  • Delia Leon-Castro & Pablo San-Martin & Felix Lopez-Iturriaga, 2025. "The Effect of ESG on Working Capital: Two for the Price of One," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 75(3), pages 343-370, September.
    • Handle: RePEc:fau:fauart:v:75:y:2025:i:3:p:343-370
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    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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