The interplay between environmental social governance (ESG) performance, access to finance and growth in unlisted firms: Evidence from Eastern Europe and Central Asia Region

Abstract

This thesis is designed as “thesis by publication” and consists of three research articles, which are at various stages of publication in high quality peer reviewed journals. Article 1 has been published in Business Strategy and the Environment, an ‘A’ ranked journal. Article 2 is currently under revise and resubmission stage with the International Journal of Auditing, which is also classified as an ‘A’ category journal. Article 3 has been submitted to the International Review of Economics and Finance, another journal with an ‘A’ ranking. The articles, which form the empirical component of the thesis, are presented in Chapters 4, 5 and 6. Article 1 examines the relationship between Environmental Social and Governance performance and Growth of Unlisted Firms. Article 2 investigates the relationship between ESG performance and Access to Finance of Unlisted Firms with interacting role of External Audit. Article 3 explores the relationship between Access to Finance and Growth of Unlisted Firms with the interacting role of ESG performance and Technological Innovation. These articles use data of unlisted firms of Eastern Europe and Central Asia. The three articles are supplemented by chapters 1, 2 3 and 7 to link the 3 articles as well as to provide a comprehensive presentation of the thesis. Chapter 1 provides an overview of the thesis followed by Literature Review in Chapter 2 and Methodology in Chapter 3. The thesis concludes with reflections in Chapter 7. Environmental, Social, and Governance performance is fundamental to a firm's long-term sustainability. The adoption of ESG practices aligns with the United Nations 2030 Agenda and its 17 Sustainable Development Goals, which highlight the importance of sustainability and encourage strategic thinking across various sectors including business. ESG performance of companies is becoming essential because now a days firms are expected not only to focus on financial performance but also to prioritise ESG considerations for sustainable growth. Investors increasingly seek companies that demonstrate long-term sustainability and financial stability. Creditors tend to favour firms that demonstrate sustainable practices, offering them better loan conditions, which in turn can drive the growth of unlisted firms. This study fills critical gaps in the existing literature on the relationship between ESG performance and firm growth, specifically for unlisted firms. Previous research has primarily focused on publicly listed firms when examining ESG impacts. However, unlisted firms contribute significantly to global GDP and employment and face unique financial constraints. Despite their economic significance, there is lack of studies that have explored how ESG practices influence their access to finance and growth, making this an important area for investigation. While ESG research has extensively examined topics (such as financial risk, firm performance, earnings management and reputation), there is limited understanding of the role of ESG in fostering firm growth in unlisted firms. Growth—measured in terms of sales, employment and asset expansion—is crucial for competitiveness, yet the connection between ESG performance and access to finance in driving firm growth remains largely unexplored, particularly in unlisted firms of emerging economies. Additionally, most ESG studies focus on developed economies such as the EU, the US, and China, while research on the Eastern Europe and Central Asia region remains limited. This region faces unique sustainability challenges including climate change, resource depletion, and pollution. Given EECA’s commitment to international agreements like the Paris Agreement, understanding the role of ESG adoption in firm growth and financial access is important in this context. There is lack of prior studies that have examined how ESG performance interacts with financial access by unlisted firms. This study investigates the impact of ESG performance on access to finance, and firm growth, while also considering the interacting role of external audit in enhancing credibility and reducing greenwashing risks. While stakeholder theory, signalling theory and legitimacy theory have been widely applied in ESG research, their application in the context of unlisted firms remains underexplored. This study highlights how ESG-driven firms can strengthen their legitimacy, secure financing and achieve sustainable growth by aligning with investor and societal expectations. By addressing these gaps, this research provides new insights into the role of ESG in fostering financial access and growth for unlisted firms, particularly in the under-researched EECA region. This thesis aims to examine three interrelated aspects of unlisted firms in the EECA region including: the impact of ESG performance on the growth of unlisted firms; the influence of ESG performance on firm’s Access to Finance with interacting role of External Audit, and the impact of access to finance on firm growth with interacting role of ESG and Technological Innovation. ESG is the primary theme of the thesis, providing an understanding of the interplay between ESG performance, access to finance and growth of unlisted firms in the EECA region. This research follows the positivist view of epistemology, objectivist ontology, and an unbiased axiology. In the positivist approach, researchers use existing theories to develop hypotheses, which are then tested, analysed, and either confirmed or refuted. This process helps to refine and expand theoretical understanding, allowing future researchers to further evaluate the findings empirically. The positivist perspective is particularly useful when a significant amount of existing research is available on the topic, enabling a systematic and objective investigation. This thesis follows a deductive approach, which is useful for developing research questions and hypotheses grounded in existing literature. The empirical relationships between independent and dependent variables across the three articles are analysed using quantitative data. The thesis uses data from the World Bank Enterprise Survey and employs Principal Component Analysis to develop the ESG index for the measurement of ESG performance. In article 1 and 3, 2SLS is applied to address endogeneity by using instrumental variables. Validity of instruments is checked by applying the Wald Test. In article 2, IV probit is used to address the endogeneity issue. The results suggest that prioritising ESG initiatives enable the management of unlisted firms to secure financing and leverage resources more effectively. ESG-focused firms tend to experience growth in financial (Sales, and Asset Growth) and nonfinancial (Employment Growth) terms. This highlights the crucial role of ESG performance in enabling unlisted firms to thrive in a competitive market with access to finance serving as a key enabler for growth. This study highlights the significance of ESG performance for unlisted firms in the EECA region, emphasising their role in resource optimisation, eco-friendly production, and addressing regional issues like pollution and biodiversity loss. Adopting ESG initiatives helps firms align with societal expectations, enhance their reputation, and drive sustainable growth. Beyond business benefits, ESG practices foster trust, community well-being, and stakeholder relationships, creating a positive impact on both firms and society. Strong governance ensures transparency, accountability, and long-term stability, strengthening credibility and resilience in economic challenges. The study underscores policymakers' role in crafting regulations that promote sustainability and in aligning with SDGs. Collaboration between governments, financial institutions, and businesses is essential to overcoming financial constraints and fostering economic resilience. By integrating ESG principles, firms can secure better financing, enhance competitiveness, and contribute to a more sustainable economy.