Does Sustainability Lower Financing Costs? Evidence from a Dynamic System GMM Analysis

Burcu Zengä°n

Fiscaoeconomia, 2026, issue 1

Abstract: This study provides a comprehensive examination of the non-linear relationship between environmental, social, and governance (ESG) performance and firms’ cost of debt. Using a balanced panel dataset of 461 U.S. non-financial firms for the period 2019–2023, the analysis employs the dynamic System-GMM estimator to address potential endogeneity, lagged dependence, and unobserved firm-level heterogeneity. The empirical findings reveal a clear U-shaped relationship between ESG performance and the cost of debt. Moderate ESG engagement enhances creditworthiness and reduces borrowing costs, whereas excessive or unbalanced ESG commitments can increase firms’ financing burdens. Robustness analyses confirm the presence of similar non-linear effects across the environmental, social, and governance dimensions, with environmental performance emerging as the strongest driver of the observed pattern. The social and governance pillars also exert significant, albeit relatively weaker, influences on borrowing costs. Overall, the results demonstrate that ESG functions as a dual-purpose strategic resource with the potential to either create value or impose financial pressures depending on its intensity. By highlighting the importance of maintaining a balanced and optimal level of ESG engagement to improve financing conditions, this study offers a meaningful contribution to the corporate finance and sustainability literature.

Keywords: ESG; Cost of Debt; System GMM (search for similar items in EconPapers)
JEL-codes: G30 G51 Q50 (search for similar items in EconPapers)
Date: 2026
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Persistent link: https://EconPapers.repec.org/RePEc:fis:journl:260125

DOI: 10.25295/fsecon.1762645

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