Finance Research Letters 46 (2022) 102407

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Finance Research Letters

journal homepage: www.elsevier.com/locate/frl

Are more sustainable firms able to operate with lower working

capital requirements?
Victor Barros a, *, Pedro Fontes Falcão b, Joaquim Miranda Sarmento a
a
ADVANCE/CSG, ISEG, Universidade de Lisboa, R. Miguel Lupi 20, Lisbon 1249-078, Portugal
b
ISCTE Business School, BRU-IUL, University Institute of Lisbon, Avenida das Forças Armadas, Lisbon 1649-026, Portugal

A R T I C L E I N F O A B S T R A C T

JEL classification: This study provides evidence on the relationship between working capital management (WCM)
G30 and firms’ sustainability level covering 1,394 US publicly-listed firms in the period 2002-2020.
G31 We find that firms with higher ESG scores operate with lower working capital requirements
Q56
and a shorter cash conversion cycle, although the effect comes entirely from the environmental
Keywords: and social pillars. The inconclusive result for the governance pillar reinforces the role of sus­
Working capital management
tainability on WCM. Outperforming firms in sustainability scores have a lesser need for cash than
Cash conversion cycle
the industry average. Overall, our findings highlight that WCM optimization may be attained
Sustainability
ESG following investment in firms’ sustainability.

1. Introduction

Sustainability has been at the core of firms’ concerns, particularly from the environmental, social and governance perspectives
(Schrettle et al., 2014). Firms are increasingly concerned with adverse headlines and negative perceptions from various stakeholders,
such as shareholders, clients, suppliers, and employees (Baah et al., 2021). Aligned with the expanding importance of sustainability
issues, the environmental, social, and governance (ESG) scores have assumed a key role in measuring the level of sustainability in firms
(Garcia et al., 2019). Academic research focusing on the impact of sustainability on investment decisions (Giese et al., 2019; El Ghoul
and Karoui, 2021), finance decisions and the level of cost of capital (Clark et al., 2015; Aracil et al., 2021), and dividend policy (Verga
Matos et al., 2020) has been on the rise in the finance literature. Sustainability has been associated with better operating and market
performance (Clark et al., 2015; Alareeni and Hamdan, 2020; Biktimirov and Afego., 2021). However, scant attention has been given
to the impact of sustainability on the working capital management (WCM) of firms.
WCM is related to the short-term capital required to fund operating activities, representing a significant proportion of a firm’s
balance sheet in several industries (Le, 2019). The literature on this topic has uncovered mixed evidence. Better WCM is related to
higher performance (Nastiti et al., 2019), particularly in large firms, with consequent increases in firms’ value (Boisjoly et al., 2020;
(Brooks and Oikonomou, 2018). Despite the positive effect on performance, the evidence points to no impact on sustainable growth
(Nastiti et al., 2019). The theory of Jensen and Meckling (1976) states that working capital measures are correlated with the firm’s
operating cycle measure (Cash Conversion Cycle, CCC). A longer CCC can increase sales and profits not only by lowering supply costs,

Victor Barros and Joaquim Miranda Sarmento gratefully acknowledge the financial support via ADVANCE-CSG, from the Fundação para a
Ciência and Tecnologia (FCT Portugal), through the research grant UIDB/04521/2020. August 2021
* Corresponding author.
E-mail address: victormbarros@iseg.ulisboa.pt (V. Barros).

https://doi.org/10.1016/j.frl.2021.102407
Received 3 July 2021; Received in revised form 6 August 2021; Accepted 23 August 2021
Available online 25 August 2021
1544-6123/© 2021 Elsevier Inc. All rights reserved.
V. Barros et al. Finance Research Letters 46 (2022) 102407

reducing lost sales, and decreasing production interruptions (Ukaegbu, 2014) but also by increasing trade credit – supporting a
relationship between firms oriented to the long term – and by increasing discounts from suppliers (Ng et al., 1999). On the other side,
firms allocating more funds to working capital that is not available to other investments may incur higher financing costs (Altaf and
Ahmad, 2019). Focusing on large Belgium non-financial firms, Deloof (2003) claims that corporate profitability is enhanced for firms
working with lower inventories and receivables days, although profitability is lower for firms that pay later to suppliers. The evidence
on the association between working capital management and profitability is mixed and may depend on the firm’s life cycle (Wang
et al., 2020).
The ESG score can provide a market perception that the firm is more sustainable (Escrig-Olmedo et al., 2019). Yet, markets also
perceive that firms operating under a low working capital regime may be facing financial constraints (Baños-Caballero et al., 2014;
Ferrando and Mulier, 2015). Furthermore, the CCC tends to be longer for firms with higher cash flows (Baños-Caballero et al., 2010).
The argument highlighted in our study is that the ESG score can be used as a risk management tool, allowing firms to signal a
perception of lower risk to the market and thus enabling them to operate under lower capital requirements to fund operations without
jeopardizing profitability. Therefore, can the perception of greater sustainability allow firms to reduce their working capital re­
quirements? Can this also lead to a shorter CCC? Are firms rated with higher ESG scores able to lower their cash requirements and have
a more flexible cash management? Pan (2020) found evidence that ESG issues integrated into cash investment decisions are relevant as
part of overall credit risk management. Built on the empirical evidence that found increased profitability for firms that performed
better on the ESG score (Clark et al., 2015; Yoon et al., 2018; Alareeni and Hamdan, 2020; Biktimirov and Afego, 2021) and on the
established relationship between working capital management and profitability (Nastiti et al., 2019; Boisjoly et al., 2020), we focus on
whether performance on the ESG score shapes a firm’s working capital management. We also look at the sub-components of the ESG
score, given that the literature has shown that higher ESG scores yield better financial performance, although this is of greater rele­
vance for the governance component in environmentally sensitive industries (Yoon et al., 2018).
This paper aims to evaluate whether firms rated as more sustainable are likely to operate under lower working capital requirements
(WCR). We employed a sample of 9618 firm-year observations from 1394 US public firms in the period 2002–2020. WCR and CCC
were used as measures for the management of working capital. We used the difference from the industry average in each year for both
variables to disentangle effects for firms deviating from the industry as a whole. The level of sustainability of each firm is measured by
the ESG score from Refinitiv Eikon (formerly, Thomson Reuters Eikon), along with each of the three pillars (Naffa and Fain, 2021).
Firm control variables that impact the firm’s cash level and management were also used.
Overall, we find that firms with a higher ESG score operate with lower WCR levels, although the effect comes entirely from the
environmental and social pillars. This finding holds for the deviations from the industry average in working capital metrics. More
sustainable firms have a lesser need for working capital than the industry average.
This paper is organized as follows: Section 2 describes the research questions, methodology and data. Section 3 presents the results
and discussion, while Section 4 draws conclusions and suggests potential avenues for future research.

2. Research methods and data

This paper seeks to answer the following research question: “Are more sustainable firms able to operate with lower working capital
requirements?”. We collected data from Refinitiv Eikon, in a sample of 1394 US public firms between 2002 and 2020, with a total of
9618 observations. The reasons for focusing on US publicly listed firms are twofold. Firstly, the US market has data availability for a
broad range of firms, operating with different sizes and covering multiple industries. Secondly, controlling for the institutional setting
is not a relevant issue in our empirical approach, unlike other studies (e.g., Barros et al. 2021).
To assess our research question, the WCR was used as the dependent variable to capture the cash requirements, calculated by
(receivables + inventories – payables) as a percentage of sales. Although there are several working capital metrics, CCC is a widely used
measure as referred in Singh et al. (2017) meta-analysis and in other studies (e.g., Deloof 2003, Baños-Caballero, García-Teruel and
Martínez-Solano 2012, Boisjoly et al., 2020; Mättö and Niskanen, 2020) due to its characteristics. For example, it can measure liquidity
with a time dimension (Wang, 2002; Afrifa and Padachi, 2016) since CCC is a dynamic method based on a firm’s operations combining
data of the balance sheet and the income statement. Also, CCC is a key indicator of a firm’s liquidity, and so it is adequate to measure
working capital (Singhania and Mehta, 2017). As a result, we decided to use CCC as a measure of WCM in this study, as the number of
days of the firm’s cash conversion cycle. Here, inventory days are computed against the cost of goods sold. We also used both variables
measured as the difference from the industry average (WCR_diff and CCC_diff).
Following this approach, we are able to evaluate the firm’s cash holding and cash cycle. All dependent variables are winsorized at
1% to constrain the variability derived from outliers. We ran the usual diagnostic tests for the dependent variable, which did not show
non-normality in the residuals.
The explanatory variables used to measure the firm’s sustainability are the Refinitiv ESG scores, along with the individual com­
ponents of the score. The ESG score is an overall firm score between 0 and 100 based on the reported information in the environmental,
social, and corporate governance pillars. This includes a controversies score incorporated within the main ESG score, although it is not
tested separately. Additional detail on the computation of the ESG score is presented in Appendix A. The econometric model used with
robust standard errors was the following:
Yit = B0 + ∂it ESGscore + δit controls + μit

For the control variables of determinants that can impact cash holding and management, we used Size (the log of the assets), Leverage

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V. Barros et al. Finance Research Letters 46 (2022) 102407

CCC Evolution ESG Scores Evolution

90

50
40
60

30
ESG score
CCC

20
30

10
0

0
2002 2006 2010 2014 2018 2002 2006 2010 2014 2018
Year Year

Fig. 1. CCC (days) and ESG scores evolution (0–100): average per year.

Table 1
Summary statistics.
N Mean Std. Dev. p25 Median p75
WCR 9618 0.169 0.128 0.080 0.157 0.233
WCR_diff 9618 0.014 0.170 -0.080 -0.013 0.059
CCC 9618 69.306 83.603 27.667 64.311 103.815
CCC_diff 9618 34.666 299.118 -40.395 -4.086 35.834
ESG score 9618 38.518 17.939 24.600 36.142 50.428
Environmental pillar 9618 28.473 27.897 0.912 20.771 50.578
Social pillar 9618 42.074 21.935 24.739 37.811 57.767
Governance pillar 9618 49.674 22.277 31.682 50.086 67.558
ESG controversies 9618 87.487 26.092 100.000 100.000 100.000
Size 9618 22.166 1.620 21.117 22.125 23.253
Leverage 9618 0.796 2.267 0.184 0.550 1.077
Current ratio 9618 2.271 2.000 1.242 1.787 2.658
Gross margin 9618 0.414 0.218 0.243 0.383 0.557
EBIT margin 9618 0.058 0.746 0.054 0.110 0.176
Market/Book 9618 3.694 6.342 1.653 2.758 4.541

(debt as a percentage of assets), Current ratio (the current assets divided by the current liabilities), Gross margin (net sales minus the
cost of goods), EBIT margin (EBIT as a percentage of sales) and Market/Book (the market value divided by the book value). The last two
are controls for firm’s performance, although they capture different angles of performance. While EBIT margin captures operating
within a year, the Market/Book is a forward-looking proxy that encompasses investors’ expectations on future performance. The usual
diagnostic tests for the model were performed. There was no sign of multicollinearity in these control variables.

3. Results and discussion

3.1. Descriptive statistics

A visual inspection of Fig. 1 demonstrates that, in some periods, a negative relationship may exist. Specifically, the rise in CCC from
2015 onwards contrasts with a downward trend in the ESG score. Table 1 presents the descriptive statistics of all variables and Table 2,
the correlation matrix. In the period under analysis, the average (median) WCR is 17% (16%) of sales, while the average (median) CCC
in days is 69 (64). The environmental pillar of the ESG score presents the most inferior performance with an average (median) of 28.5
(20.8) on a 0 to 100 scale; it also shows considerably greater variability. The control variables present figures at conventional levels.

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 V. Barros et al.
Table 2
Correlation matrix.
Variables (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) (15)
(1) WCR 1.00
(2) WCR_diff 0.73* 1.00
(3) CCC 0.78* 0.57* 1.00
(4) CCC_diff 0.24* 0.41* 0.29* 1.00
(5) ESG score -0.11* -0.09* -0.03* -0.03* 1.00
(6) Environmental pillar -0.15* -0.14* -0.05* -0.06* 0.81* 1.00
(7) Social pillar -0.10* -0.08* -0.03* -0.02* 0.83* 0.75* 1.00
4

(8) Governance pillar -0.11* -0.09* -0.06* -0.03* 0.67* 0.45* 0.40* 1.00
(9) ESG controversies 0.13* 0.10* 0.07* 0.03* -0.07* -0.34* -0.33* -0.18* 1.00
(10) Size -0.24* -0.18* -0.14* -0.03* 0.49* 0.61* 0.52* 0.37* -0.42* 1.00
(11) Leverage 0.00 0.00 0.00 0.00 0.04* 0.05* 0.03* 0.03* -0.03* 0.11* 1.00
(12) Current ratio 0.34* 0.26* 0.31* 0.11* -0.18* -0.21* -0.17* -0.14* 0.13* -0.37* -0.09* 1.00
(13) Gross margin -0.01 0.05* -0.07* 0.05* 0.03* -0.02 0.06* -0.01 -0.01 0.01 -0.05* 0.12* 1.00
(14) EBIT margin -0.11* -0.11* 0.05* -0.01 0.10* 0.11* 0.07* 0.09* -0.04* 0.21* 0.02 -0.16* 0.03* 1.00
(15) Market/Book 0.02* 0.04* 0.03* 0.05* 0.02* 0.01 0.04* -0.02* 0.00 -0.06* 0.69* 0.04* 0.10* 0.00 1.00
* p<0.1

Finance Research Letters 46 (2022) 102407

V. Barros et al. Finance Research Letters 46 (2022) 102407

Table 3
Results (WCR and CCC).
(1) (2) (3) (4) (5) (6) (7) (8)
WCR CCC WCR CCC WCR CCC WCR CCC
Explanatory variables
ESG -0.0003*** -0.0191
(0.0001) (0.0549)
Environmental -0.0003*** -0.0680
(0.0001) (0.0444)
Social -0.0002** 0.0287
(0.0001) (0.0501)
Governance -0.0001 -0.0215
(0.0001) (0.0457)
Control variables
Size 0.0138*** 7.8234*** 0.0164*** 8.9328*** 0.0128*** 7.1400*** 0.0109*** 7.7833***
(0.0037) (2.3649) (0.0040) (2.4939) (0.0035) (2.2640) (0.0034) (2.3856)
Leverage 0.0002 -0.5030 0.0001 -0.5343 0.0002 -0.4861 0.0003 -0.4990
(0.0007) (0.4678) (0.0008) (0.4641) (0.0008) (0.4701) (0.0008) (0.4703)
Current ratio 0.0049*** 4.4857*** 0.0050*** 4.4926*** 0.0049*** 4.4911*** 0.0049*** 4.4838***
(0.0018) (0.7586) (0.0018) (0.7564) (0.0018) (0.7577) (0.0018) (0.7581)
Gross margin -0.0537* -159.5309*** -0.0543* -159.0264*** -0.0541* -160.3323*** -0.0582* -159.7797***
(0.0320) (32.8629) (0.0319) (32.9450) (0.0319) (32.8612) (0.0315) (32.7321)
EBIT margin 0.0027 19.6171*** 0.0027 19.6048*** 0.0027 19.6281*** 0.0027 19.6151***
(0.0046) (4.0989) (0.0046) (4.0938) (0.0046) (4.0984) (0.0046) (4.0975)
Market/Book 0.0001 0.1946 0.0001 0.2054 0.0001 0.1870 0.0001 0.1926
(0.0003) (0.1875) (0.0003) (0.1865) (0.0003) (0.1876) (0.0003) (0.1880)
_cons -0.1146 -48.9480 -0.1744* -72.5781 -0.0952 -35.4088 -0.0531 -47.6145
(0.0846) (53.3928) (0.0905) (56.6935) (0.0794) (51.5893) (0.0784) (53.2841)
Observations 9,618 9,618 9,618 9,618 9,618 9,618 9,618 9,618
Adj R2 0.019 0.109 0.024 0.110 0.017 0.109 0.017 0.109
Year FE Yes Yes Yes Yes Yes Yes Yes Yes
Firm FE Yes Yes Yes Yes Yes Yes Yes Yes

This table presents the results of our OLS model for the WCR (Working Capital Requirements) and the CCC (Cash Conversion Cycle). We ran these
same regressions using solely EBIT margin or Market/Book, as these two variables could capture a similar effect. Results are similar to those presented
in this table. Robust standard errors are in parentheses; *** p<.01, ** p<.05, * p<.1

3.2. The relationship between sustainability performance and WCM

This paper analyses whether firm sustainability is a signal to the market, allowing firms to operate with less investment in working
capital and shorter cash cycles. Table 3 exhibits the results for the cash requirements and cash cycle (WCR and CCC), while Table 5
provides the results for both when measured by the difference from the industry average (WCR_diff and CCC_diff). The difference aims
to assess whether deviations from the industry average are explained by different levels of sustainability metrics.
Concerning cash requirements, Table 3 offers evidence that firms with a higher ESG score reduce the WCR, thus allowing firms to
operate with lower investments in working capital. This effect is the product of the environmental and social components. Interest­
ingly, there is no evidence that the governance component influences working capital requirements in any of the estimations. Neither
the ESG score nor any of its components have any impact on CCC.
For robustness purposes, we executed an Arellano-Bond linear dynamic panel-data estimation (presented in Table 4) and a lagged
variable regression (not formally reported in this paper), allowing us to understand effects from potential endogeneity issues. Overall,
these analyses corroborate our main findings, especially for the primary proxy for working capital management. Table 4 presents
similar results for the dependent variable WCR. It is clear that even controlling for potential endogeneity, firms with a higher ESG (and
also with a higher Environmental and Social Index) are able to operate with lower working capital requirements. Moreover, like the
previous results, these robustness checks also present that ESG does not seem to affect the dependent variable CCC. Furthermore,
regarding the control variables, results are also in line with the ones presented before.

3.3. The effect of underperformance within the industry

Results from Table 5 concerning the difference from the industry average show similar findings concerning cash requirements.
Again, more sustainable firms have a lesser need for cash than the industry average. Firms with a higher ESG score tend to have a lower
WCR_diff, meaning a lower WCR when compared with the average of their competitors. Likewise, the impact is from the environment
and the social components of the ESG score, with no impact from governance. The within industry analysis allows us to capture
patterns in the ESG score that are industry specific, as the ESG scores from Refinitiv are not industry adjusted. We also found evidence
that an increase in the ESG score reduces the CCC_diff. More sustainable firms appear to have better cash cycles than the average of
their competitors. Again, the impact comes from the environment and social components of the ESG score, with the governance
component not being significant.
For equal levels of the ESG score, controlling for the other factors, firms should not deviate significantly deviation from the market

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V. Barros et al. Finance Research Letters 46 (2022) 102407

Table 4
. Results (WCR and CCC)-endogeneity robustness control.
(1) (2) (3) (4) (5) (6) (7) (8)
WCR CCC WCR CCC WCR CCC WCR CCC
Explanatory variables
ESG -0.0003** -0.0224
(0.0001) (0.0445)
Environmental -0.0004*** -0.0417
(0.0002) (0.0511)
Social -0.0004*** -0.0422
(0.0002) (0.0506)
Governance -0.0001* -0.0043
(0.0001) (0.0267)
Control lagged variables
L. WCR 0.3456*** 0.3079*** 0.3319*** 0.3712***
(0.1063) (0.1045) (0.1054) (0.1070)
L. CCC 0.5345*** 0.5280*** 0.5303*** 0.5376***
(0.0712) (0.0704) (0.0707) (0.0711)
Control variables
Size 0.0114** 0.3160 0.0152*** 0.7626 0.0139*** 0.7056 0.0078 0.0390
(0.0053) (2.4160) (0.0051) (2.2806) (0.0053) (2.2351) (0.0057) (2.5812)
Leverage 0.0016*** 0.5335 0.0016*** 0.5291 0.0016*** 0.5292 0.0016*** 0.5391
(0.0006) (0.3381) (0.0006) (0.3363) (0.0006) (0.3369) (0.0006) (0.3399)
Current ratio 0.0020** 1.1857** 0.0019** 1.1881** 0.0019** 1.1837** 0.0020** 1.1849**
(0.0010) (0.5962) (0.0010) (0.5917) (0.0010) (0.5923) (0.0010) (0.5987)
Gross margin -0.0497 -97.5973*** -0.0516 -97.5116*** -0.0489 -97.3899*** -0.0524 -97.8180***
(0.0519) (33.4781) (0.0515) (33.3654) (0.0516) (33.4797) (0.0524) (33.4971)
EBIT margin -0.0212 -13.2483 -0.0214 -13.1746 -0.0212 -13.1870 -0.0211 -13.2920
(0.0295) (8.6297) (0.0291) (8.6175) (0.0294) (8.6145) (0.0298) (8.6382)
Market/Book -0.0006*** -0.2691* -0.0006*** -0.2677* -0.0006*** -0.2679* -0.0006*** -0.2720*
(0.0002) (0.1381) (0.0002) (0.1378) (0.0002) (0.1377) (0.0002) (0.1391)
_cons -0.1136 66.2171 -0.1925* 57.0268 -0.1630 58.6568 -0.0419 71.6172
(0.1234) (52.3982) (0.1158) (48.8876) (0.1210) (48.9374) (0.1341) (55.8884)
Observations 6,843 6,843 6,843 6,843 6,843 6,843 6,843 6,843
Chi2 53.69 125.21 61.59 125.30 57.97 125.20 46.78 125.76
Year FE Yes Yes Yes Yes Yes Yes Yes Yes
Firm FE Yes Yes Yes Yes Yes Yes Yes Yes

This table presents the results for our robustness analysis, using the Arellano-Bond estimator with a lag of one period. Robust standard errors are in
parentheses; *** p<.01, ** p<.05, * p<.1

average. Yet, our results show that better levels of the ESG score lead to lower levels of cash and better cash cycles. This indicates that
firms ought to be concerned with sustainability factors because they provide signals to the market, allowing for better cash optimi­
zation. But firms need to give further attention to the governance pillar.
Control variables present associations similar to those identified in the existing literature. Larger firms (Size) with greater growth
potential (Market/Book) operate with higher WCR, while better gross margins have the opposite effect. EBIT margin has a positive
impact but solely on CCC. When using the variables WCR_diff and CCC_diff, the variable control Size only increases for the CCC_diff,
with Market/Book also having the same effect. In contrast, Gross margin has a negative impact on both metrics for the difference from
the industry average. Coefficients in even columns increase as it shows sensitivity to a dependent variable which is now measured as in
days rather than scaled by firms’ sales.

4. Conclusions and future research

The literature on working capital management claims an influence on profitability (Nastiti et al., 2019; Boisjoly et al., 2020), and
most studies on sustainability are consistent in citing a positive effect on profitability (Clark et al., 2015; Alareeni and Hamdan, 2020;
Biktimirov and Afego, 2021). Therefore, we contribute to the literature by linking the two theoretical streams to assess whether more
sustainable firms can operate with lower working capital requirements, which fits into a risk management perspective (Pan, 2020).
This study is innovative in finding evidence that firms with a higher ESG score operate with lower WCR levels. Additionally, it
establishes that the effect comes entirely from the environmental and social pillars. Future research should identify the causal effects
between the ESG score and both pillars, and WCR.
The traditional pillar, governance, does not shape this relationship. On the one hand, the conclusion runs counter to previous
empirical evidence on the ESG score and performance (Yoon et al., 2018). On the other hand, it is somewhat to be expected considering
that governance issues have for a long time been incorporated into a firm’s risk assessment beyond corporate social responsibility
issues (Ferrero-Ferrero et al., 2015). Therefore, such an effect may be fully accounted for. However, future research should further
analyze the reasons for this lack of impact from the governance pillar.
Looking at deviations from the industry average on working capital management, we find that more sustainable firms have a lesser
need for cash than the industry average. Similar to the main analysis, the relationship only holds for the environmental and social

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Table 5
Results difference to the industry average (WCR and CCC).
(1) (2) (3) (4) (5) (6) (7) (8)
WCR_diff CCC_diff WCR_diff CCC_diff WCR_diff CCC_diff WCR_diff CCC_diff
Explanatory variables
ESG -0.0005*** -0.6697**
(0.0002) (0.3384)
Environmental -0.0007*** -0.9780***
(0.0001) (0.2521)
Social -0.0004** -0.9269**
(0.0002) (0.3617)
Governance -0.0002 -0.1668
(0.0001) (0.2449)
Control variables
Size 0.0116* -0.4323 0.0188*** 10.4681 0.0112* 5.1684 0.0066 -7.4289
(0.0061) (12.1937) (0.0063) (12.4714) (0.0060) (12.8970) (0.0057) (11.8596)
Leverage -0.0017 -5.5200 -0.0019 -5.8322 -0.0017 -5.6141 -0.0015 -5.3058
(0.0013) (3.6938) (0.0013) (3.7164) (0.0013) (3.7205) (0.0013) (3.6540)
Current ratio 0.0025 4.5964 0.0025 4.7085 0.0024 4.4608 0.0025 4.5983
(0.0030) (6.0080) (0.0030) (6.0666) (0.0030) (5.9962) (0.0030) (5.9918)
Gross margin -0.0719* -167.4453*** -0.0711* -165.4175*** -0.0710* -158.5751*** -0.0788** -176.2811***
(0.0402) (60.5805) (0.0399) (60.7811) (0.0402) (60.2870) (0.0395) (59.7195)
EBIT margin 0.0032 1.1877 0.0032 1.0727 0.0032 1.0331 0.0033 1.2542
(0.0061) (15.5350) (0.0061) (15.6245) (0.0061) (15.5642) (0.0060) (15.4872)
Market/Book 0.0009 3.0850* 0.0009 3.1790* 0.0008 3.1302* 0.0008 2.9883*
(0.0006) (1.7149) (0.0006) (1.7138) (0.0006) (1.7179) (0.0006) (1.7015)
_cons -0.2013 121.8669 -0.3602** -118.8831 -0.1956 7.4750 -0.0975 263.2808
(0.1341) (267.6752) (0.1418) (275.4303) (0.1324) (280.0417) (0.1274) (260.1444)
Observations 9,618 9,618 9,618 9,618 9,618 9,618 9,618 9,618
Adj R2 0.004 0.003 0.009 0.005 0.004 0.004 0.002 0.003
Year FE Yes Yes Yes Yes Yes Yes Yes Yes
Firm FE Yes Yes Yes Yes Yes Yes Yes Yes

This table presents the results of our OLS model for the WCRdiff (difference in the Working Capital Requirements from the industry average, per year)
and the CCCdiff (difference in the Cash Conversion Cycle from the industry average, per year). Robust standard errors are in parentheses; *** p<.01,
** p<.05, * p<.1

components of the ESG score, with no impact from the governance pillar. Taken all together, our findings highlight that investing in
ESG factor analysis allows firms to operate with lower levels of working capital, thus indirectly enabling firms to operate with lower
debt levels. Future research should disentangle the WCR and CCC proxies to capture effects from each dimension and analyze cross
effects between these dimensions.

Declaration of Competing Interest

The authors declare not having competing interests to declare.

Appendix A

Refinitiv builds the ESG Score following a bottom-up approach, covering more than 500 data points grouped into 186 metrics for 10
categories. The collection process is sourced by annual reports; company websites, NGO websites; stock exchange fillings, CSR reports
and news sources.
These data points are collected for each metric and then aggregated into each category and later into each pillar. The Environ­
mental pillar is composed of three main categories of metrics: (i) Resources use (20 metrics); (ii) Emissions (28); and (iii) Innovation
(20). The Social pillar has four categories, namely: (i) Workforce (30 metrics); (ii) Human rights (8); (iii) Community (14); and (iv)
Product responsibility (10). The Governance pillar is also composed of three categories: (i) Management (35 metrics); (ii) Shareholders
(12); (iii) Corporate social responsibility strategy (9).
Later, each pillar is normalized to a range between 0 and 100. A Controversies score with 23 data points is also considered in
parallel to the 3 ESG pillars. Next, the normalized pillars are weighted to obtain the ESG (combined) score. The database allows the
scores to be partially computed considering industry-based relative performance. Therefore, scores are industry adjusted to facilitate
comparability within peer groups. Otherwise, some industries would be ESG laggards in some pillars (e.g., oil & gas in the Environ­
mental pillar) due to their business nature.
Examples of data points for the Environmental pillar are: Targets Energy Efficiency; Renewable Energy Use; Emission Reduction
Target Percentage; Water Recycled; Waste Recycling Ratio. The Social pillar covers issues as: Targets Diversity and Opportunity; Salary
Gap; Women Employees; Average Training Hours; Policy Human Rights; Donations / Million in Revenue $; Policy Bribery and Cor­
ruption. Lastly, in the Governance pillar, the data points cover: Audit Committee Independence; Number of Board Meetings; Board
Size; Voting Cap Percentage; Equal Shareholder Rights; Non-audit to Audit Fees Ratio; CSR Sustainability Committee, to name a few.

7
V. Barros et al. Finance Research Letters 46 (2022) 102407

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