How ESG Performance Affects Cost of Capital?

Haihan Ding ()
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Haihan Ding: Beijing Normal-Hong Kong Baptist University, Faculty of Business and Management

A chapter in Proceedings of the 2026 11th International Conference on Financial Innovation and Economic Development (ICFIED 2026), 2026, pp 506-517 from Springer

Abstract: Abstract The integration of Environmental, Social, and Governance (ESG) factors into corporate decision-making has become a focal point for investors and companies alike, driven by a heightened emphasis on sustainable development. This study examines the nuanced relationship between ESG performance and the cost of capital, utilizing panel data from US listed companies over the period from 2002 to 2021. The findings indicate a significant negative relationship between high ESG scores and the cost of debt, attributed to reduced information asymmetry, enhanced investor confidence, and lower risk perceptions. In contrast, there is no substantial effect on the cost of equity, suggesting that equity investors may prioritize financial metrics over sustainability indicators. Further analysis shows that the debt-reducing effect of ESG was more pronounced before 2010 and among firms with lower leverage levels, underscoring the roles of regulatory evolution and financial risk. The study provides valuable implications for corporate managers, investors, and policymakers aiming to leverage ESG practices for improved financial outcomes and sustainable growth, highlighting the need for integrating ESG considerations into strategic decision-making processes.

Keywords: ESG Performance; Cost of Capital; Sustainable Finance; Heterogeneity (search for similar items in EconPapers)
Date: 2026
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Persistent link: https://EconPapers.repec.org/RePEc:spr:advbcp:978-94-6239-642-5_49

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DOI: 10.2991/978-94-6239-642-5_49

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