The Relationship between ESG and Cost of Capital: A Structural Equation Modelling Approach

Cosmin-Dănuț Vezeteu (), Raluca-Ioana Stănciulescu () and Camelia Ungureanu ()
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Cosmin-Dănuț Vezeteu: Bucharest University of Economic Studies, Romania. Corresponding author
Raluca-Ioana Stănciulescu: Bucharest University of Economic Studies, Romania.
Camelia Ungureanu: Transilvania University of Brașov, Romania.

Journal for Economic Forecasting, 2025, issue 3, 44-67

Abstract: Sustainable finance has become an increasingly popular topic for both researchers and investment professionals. ESG ratings offer a reasonably equitable quantitative evaluationof a company’s sustainability, but empirical studies on the relationship between these scores and the cost of capital are rather scarce and show divergent results. This paper aims to address this research gap through a novel structural equation modelling approach, specifically the Random Intercept – Cross Lagged Panel Model (RI-CLPM). This econometric technique is applied on a global dataset, from 2016 to 2023, with the aim to determine the influence of ESG on cost of capital and its components, namely the cost of debt and the cost of equity, before and during the COVID-19 pandemic. The results reveal an inconsistent impact of ESG on capital components: while ESG does not significantly affect the cost of capital or the cost of equity, a significant negative relationship observed regarding the cost of debt when analyzed as the dependent variable during pre-pandemic years at the total sample level. However, a more in-depth analysis reveals that this outcome is regionally dependent. This article contributes to the growing literature on sustainable finance by providing a rigorous econometric framework that investigates the reciprocal effects between financial and ESG performance metrics.

Keywords: Sustainable finance; ESG; Cost of capital; Structural Equation Modelling; RI-CLPM (search for similar items in EconPapers)
JEL-codes: C58 G17 Q56 (search for similar items in EconPapers)
Date: 2025
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