Impact of the Environmental, Social, and Governance Rating on the Cost of Capital: Evidence from the S&P 500

Dietmar Ernst () and Florian Woithe
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Dietmar Ernst: International School of Finance (ISF), Nuertingen-Geislingen University, Sigmaringer Straße 25, 72622 Nuertingen, Germany
Florian Woithe: International School of Finance (ISF), Nuertingen-Geislingen University, Sigmaringer Straße 25, 72622 Nuertingen, Germany

JRFM, 2024, vol. 17, issue 3, 1-15

Abstract: We use the S&P 500 to investigate whether companies with a good ESG score benefit from a lower cost of capital. Using Bloomberg’s financial data and MSCI’s ESG score for 498 companies, we calculated the measures of descriptive statistics, finding that companies with better ESG ratings enjoy both a lower cost of equity and a lower cost of debt. However, their WACC shows no improvement with a higher ESG score. Companies with a poor ESG rating have a lower WACC due to the higher proportion of debt capital, coupled with a higher cost of debt, compared to the cost of equity capital. Calculating the Pearson correlation coefficient, we found a slightly negative linear relationship between the ESG score and the beta factor, and between the ESG score and the cost of debt. No linear relationship was found between the WACC and the ESG score. Finally, linear regression analysis shows a negative and significant effect of the ESG score on the root beta factor. This research indicates that companies with better ESG scores benefit from lower cost of equity and debt. Our results may encourage companies to operate more sustainably to reduce their cost of capital.

Keywords: beta; cost of capital; CSR; ESG; ESG-rating; ESG-score; sustainability (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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