ESG-Based Sustainability Performance and its Impact on Cost of Capital: International Evidence from the Energy Sector

Abstract

The purpose of this article is to examine the impact of firms’ sustainability performance, measured through their ESG (environmental, social, and governance) scores, on their cost of capital. Using the data of 125 companies from 24 countries for an eleven-year period from 2009 to 2019, we run panel data regressions to find out the impact of ESG scores on two measures of cost of capital: cost of debt, and cost of equity. We run pooled and panel regressions. The results reveal an inverse relationship between cost of capital and overall ESG scores. As a robustness check, we run the analyses according to the generalized method of moments, leading to similar results. For the individual scores of the environmental, social, and governance pillars, the results are mixed. The results imply that companies should adopt a holistic approach and engage in all dimensions of sustainability.