SUSTAINABLE FINANCE DECISIONS AND ENGAGEMENT IN ESG PILLARS IN LATIN AMERICAN LISTED COMPANIES

Using an innovative ESG values-based theoretical and methodological framework, we examine the role of positive engagement in the ESG pillars in the dynamics of corporate financing decisions. We build on the sustainable finance literature by operationalizing it through company-level ESG engagement and integrating value-based (neoclassical) and ESG values-based related factors into a dynamic capital structure adjustment model. We investigate the financial decisions of Latin American listed companies during the period 2003–2023. Methodologically, we extend the partial-adjustment model by jointly estimating a traditional (neoclassical) value-based target and an ESG values-based target, allowing ESG engagement to affect the target level and the adjustment process. Our results show that incorporating ESG values into target capital structure estimation leads to a systematically higher target capital structure relative to the traditional value-based benchmark. This upward shift is primarily driven by environmental and social engagement, which are associated with more capital-intensive strategies that require substantial financial resources. Consistent with this mechanism, positive engagement in these pillars increases short-term adjustment frictions, resulting in a wider gap between observed and target capital structure. These results are robust across alternative capital structure proxies and country-level subsamples. From an empirical perspective, comparative evidence between ESG-engaged companies and the full sample indicates that, when considering only the neoclassical target capital structure, non-ESG-engaged companies adjust their capital structure more rapidly. From a managerial perspective, our findings highlight that ESG engagement, particularly in the environmental and social dimensions, affects not only target levels but also the pace and efficiency of capital structure adjustment, implying that managers and investors should explicitly account for ESG-related financing frictions when designing capital structure strategies in emerging markets.