Cost of Capital and ESG

The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/2040-8021.htm
SAMPJ
15,3 The impact of a firm’s ESG score
on its cost of capital: can a high
ESG score serve as a substitute for
676 a weaker legal environment
Received 1 May 2023 Randy Priem and Andrea Gabellone
Revised 13 September 2023
21 November 2023
UBI Business School, Brussel, Belgium
Accepted 1 January 2024
Abstract
Purpose – This article aims to analyse the relationship between the environmental, social and governance
(ESG) score and the cost of capital of 600 large, mid and small capitalization companies across 17 countries
that are component of the EURO STOXX 600 Index. By examining whether ESG has an impact on the cost of
capital, this article contributes to the solutions to improve the impact of organizations and societies on
sustainable development. The article further examines whether the effect is because of the environmental,
social and/or governance components. In addition, the article analyses which WACC component (i.e. the cost
of equity, the cost of debt, the beta or the leverage ratio) is affected. Furthermore, this article analyses whether
a high ESG score can substitute for a weaker legal environment.
Design/methodology/approach – The results were obtained by using ordinary least squares panel data
modelling to analyse the relationship between the ESG score and the cost of capital. The sample consists of
companies that are part of the STOXX Europe 600 Index over the period 2018–2021, which is composed of 600
companies, including large, mid and small capitalization firms listed across 17 countries. The sample finally
includes 1,960 firm-year observations.
Findings – Companies with a higher ESG score tend to have a lower cost of capital, but this relationship
holds only for firms domiciled in countries with a weaker legal environment. In addition, these firms should
not only increase their ESG score to create a more sustainable environment but also to reduce their cost of
debt. Environmental and social factors have a significantly negative impact on the cost of capital only in
countries with a weaker legal environment, while the governance component positively impacts the cost of
capital by allowing firms to borrow more.
Research limitations/implications – There is not yet a standardized taxonomy to define ESG, making
the study dependent on commercial data providers.
Practical implications – The new insights can be used by companies domiciled in countries with weaker legal
environments to reduce their cost of capital. The results also allow us to know on which components of the ESG score
to focus. It can also help policymakers, specifically those in countries with a weaker legal environment, to provide
incentives to further stimulate ESG investments and disclosure, thereby contributing to a more sustainable society.
Social implications – To achieve the sustainable development goals put forward by the United Nations, it
is important for firms to invest in ESG projects. It is nevertheless insightful to know whether these ESG
investments, which are currently observed as a cost, also provide benefits to firms and in which countries. If
firms clearly see the advantages of investing in ESG projects, they are likely to proactively engage in them.
Originality/value – This article is the first, to the best of the authors’ knowledge, to focus on 17 European
countries, thereby capturing divergent legal environments. This setting allows us to answer the main novel research
question, namely, whether the ESG score can act as a substitute for the legal environment in which the company is
Sustainability Accounting,
Management and Policy Journal JEL classification – G3, G31, Q5
Vol. 15 No. 3, 2024
pp. 676-703 The authors like to thank Giuseppe Bellia, Gaston Fornez, Maria Altamira, Alvaro Mendez, Ro
© Emerald Publishing Limited van den broeck, Sebastien Wolf, Sebastien Martino, An De Pauw, Joachim Van Wymmeersch and
2040-8021
DOI 10.1108/SAMPJ-05-2023-0254 Sofie Verweire for their useful comments on an earlier version of this article.
domiciled. The article also goes further than previous articles by examining whether the effect is because of the The impact of
environmental, social and/or governance component and whether these impact the components of the weighted cost
of capital, namely, the cost of equity, the cost of debt, the beta or the leverage ratio of the companies. a firm’s ESG
Keywords ESG, Cost of capital, Sustainable finance, Capital structures
score
Paper type Research paper
1. Introduction 677
On 25 September 2015, the United Nations adopted the 2030 Agenda for Sustainable
Development. The 2030 Agenda contains the 17 sustainable development goals (SDGs) [1]
and covers the three dimensions of sustainability: environmental, social and governance
(ESG) [2]. These goals recognize that ending poverty must go hand-in-hand with strategies
that improve health and education, spur economic growth and reduce inequality while also
tackling climate change. The objective is to reach these goals by 2030.
In addition to the SDGs, the European Union approved on 5 October 2016, the Paris
Agreement adopted under the United Nations Framework Convention on Climate Change.
One of the goals is to strengthen the response to climate change by making financial flows
consistent with a pathway towards low greenhouse gas emissions and climate-resilient
development. As a result, the Commission mandated in December 2016 a high-level expert
group to develop a Union strategy on sustainable finance, which reported on 31 January
2018, that a technically robust classification system should be created to establish clarity on
which activities quality as “green” or “sustainable”.
The European Commission published on 8 March 2018, its action plan on financing
sustainable growth, launching a comprehensive and ambitious strategy for sustainable finance.
One objective of this action plan is to reorient capital flows towards sustainable investments to
achieve inclusive and sustainable growth. This work finally resulted in the Sustainable Finance
Disclosure Regulation (SFDR) [3] and the Taxonomy Regulation [4]. While SFDR focuses on
disclosure by financial participants (e.g. investment firms and credit institutions), the
Taxonomy Regulation has a broader scope and contains a classification system, thereby
establishing a list of environmentally sustainable economic activities and providing companies,
policymakers and investors with appropriate definitions for which economic activities can be
considered environmentally sustainable. On 10 December 2021, a delegated act supplementing
the Taxonomy Regulation was published in the Official Journal of the European Union,
specifying the content, methodology and presentation of information to be disclosed concerning
the proportion of environmentally sustainable economic activities in their investments, lending
or business activities. Further regulatory standards are currently under development.
On 21 April 2021, the European Commission proposed a Corporate Sustainability
Reporting Directive [5], amending the existing reporting requirements of the non-financial
reporting directive (NFRD) [6]. Where the NFRD set rules for large public-interest companies
(i.e. companies with more than 500 employees, including listed entities, banks and insurance
companies) containing the rules on the disclosure of non-financial and diversity information,
the new directive would apply to listed companies, banks, insurance companies and other
companies designated by national authorities as public-interest entities. These entities
would have to publish information related to environmental matters, social matters,
treatment of employees, respect for human rights, anti-corruption and bribery and diversity
on company boards. The proposal would not only apply to EU-based companies but also to
non-EU-based companies that have a subsidiary in the European Union.
Because of the aforementioned global and European rules and incentives, sustainable
investing has set records (see, e.g. de Zwaan, 2015). While definitions of ESG might vary between
SAMPJ Europe and other parts of the world, ESG investments are expected to rise to $50tn by 2025 [7].
15,3 According to Bloomberg, Europe and the USA are currently the market leaders with a total of
$30tn in assets under management, followed by Japan, Canada and Australia. In a survey
conducted by PwC (2021) [8], nearly 80% of investors responded that ESG was an important
factor in their investment decision-making. Even more, 50% of the investors indicated that they
are willing to divest companies from their portfolios that do not have clear and measurable ESG
678 targets. These figures illustrate that corporates should not only contribute to the current social
and environmental sustainability challenge by increasing their ESG score but should also do so if
they wish to continue attracting investors’ funds in the future, especially at a low cost. Although
some scholars find evidence that firms with high ESG ratings are found to enjoy better financial
and market performance (Aboud and Diab, 2019), the question for many corporates also arises
whether the additional costs to increase the ESG score are compensated by other financial
advantages, such as the ability to have a lower cost of capital.
This article is the first to analyse the relationship between the ESG score and the cost of
capital of 600 large, mid and small capitalization companies across 17 countries that are
component of the EURO STOXX 600 Index. The article further examines whether the effect is
because of the environmental, social and/or governance components. In addition, we analyse
whether all components of the weighted cost of capital (WACC), such as the cost of equity, the
cost of debt, the beta or the leverage ratio of the companies, are impacted. In this way, we can
examine whether, e.g. creditors or shareholders have a different perception of the benefits of
ESG activities. This article focuses on the impact on the cost of capital, as this represents an
important factor for the viability and growth of a business given that it impacts the decision
whether to take on specific projects, carry on investments or raise further capital.
By examining whether corporates with a higher ESG score obtain a lower cost of capital,
we contribute to the sustainability literature on the relationship between non-financial
disclosures and the cost of capital. Previous literature on the impact of ESG on the cost of
capital is currently scarce, which focuses mainly on the cost of debt (e.g. Goss and Roberts,
2011; Oikonomou et al., 2012), the cost of equity (e.g. Sharfman and Fernando, 2008; El Ghoul
et al., 2011), both (e.g. Gonçales et al., 2022; Yilmaz, 2022) or leverage (e.g. Adeneye et al., 2022)
without focusing on other aspects of the weighted cost of capital as dependent variables, such
as beta. These studies often find contradictory or inclusive results, most likely because they
focus on particular countries, such as the USA (e.g. Sharfman and Fernando, 2008; Dhaliwal
et al., 2011), Canada (Richardson and Welker, 2001), South Africa (e.g. Johnson, 2020),
Malaysia (e.g. Atan et al., 2018), Australia (e.g. Bhuiyan and Nguyen, 2020), China (e.g. Liu
et al., 2023; Chen et al., 2023), Japan (e.g. Suto and Takehara, 2017), emerging countries, such as
Kuwait, the Philippines, Qatar and Indonesia (e.g. Mohammad et al., 2023), and Latin America
(e.g. Ramirez et al., 2022). Besides, the European continent seems to be largely ignored. For
European corporations that need to adhere to all new types of sustainable regulation, it is not
yet sufficiently clear whether their cost of capital can be decreased by investing more heavily
in ESG projects. The results of previous studies might also not be generalized to the European
region given that the stringency of regulations and the associated level of litigation risk are
different between continents (see e.g. Dhaliwal et al., 2011).
As the European continent, including the UK, is diverse in terms of countries’ legal
ecosystems (i.e. common vs civil law countries), examining Europe offers the opportunity to be
the first to examine whether the impact of a firm’s ESG score on its cost of capital differs
between countries with divergent institutional settings. If a country indeed has a weaker legal
environment, it might be expected that corporations domiciled in that country try to
compensate to convince financiers to provide funds at a lower rate by improving their ESG
rating and disclosure. To test this assumption, this article is the first, to the best of the authors’
knowledge, to explore whether the World Bank’s Governance Indicators (i.e. voice and The impact of
accountability, political stability and absence of violence/terrorism, government effectiveness, a firm’s ESG
regulatory quality, rule of law and control of corruption) moderate the relationship between the
firms’ ESG score and their cost of capital. In this way, this article brings together research from
score
a range of disciplinary approaches to address social and environmental sustainability
challenges by improving the understanding of the mechanisms by which ESG affects a firm’s
cost of capital and the interplay between firm-level and country-level governance.
This article further contributes to the literature by not only examining whether the ESG 679
score has an impact on its cost of capital but also whether the individual dimensions of ESG
have an impact. Until now, it has indeed not been examined whether the impact of
ESG factors on the cost of capital is different, and financiers thus attach more importance to
one dimension over the other. Compared to previous literature (e.g. Dhaliwal et al., 2011; Ng
and Rezaee, 2015), we also examine the impact on the cost of capital components, which are
the cost of debt, the cost of equity, beta and the leverage ratio of the firm. Compared to
previous literature focusing on a single component of the cost of capital, this article thus
provides a more holistic view on whether ESG positively or negatively impacts a firm’s cost
of capital and the underlying reasons why this is the case.
We find significant evidence that companies with a higher ESG score have a lower cost of
capital, but this relationship holds only for firms domiciled in countries with a weaker legal
environment, thereby providing evidence for the substitution effect. The ESG score does not seem
to have a significant impact on the cost of equity and the beta, although the ESG score has a
significant negative impact on the cost of debt for firms located in a country with a weaker legal
environment. In these countries, creditors have fewer rights and might feel more protected in case
a firm has a higher ESG score, thereby signalling their high-quality firm-specific governance
(see, e.g. Shevelena, 2022). Credible disclosures could thus reduce an information asymmetry
between a firm and its creditors (see, e.g. Zhu, 2014). In countries with a higher legal environment,
the cost of debt is generally already lower (see, e.g. Djankov et al., 2003; Qi et al., 2010) so an ESG
score could matter more for those firms having a higher cost of debt because they are located in a
country with a weaker legal environment. In countries with a higher legal environment, investors
are willing to fund debt marks at a lower cost because the control mechanisms of laws are in
place to mitigate agency conflicts at firms by facilitating corporate governance practices (see, e.g.
Ozer and Cam, 2022). Thus, it is in countries with a lower legal environment that the ESG rating
is still of particular relevance. We further see that firms with a high ESG score can significantly
obtain more leverage. In terms of the ESG components, especially the environmental and social
factors, they have a significantly negative impact on the cost of capital, mainly in countries with a
weaker legal environment, suggesting that investments in ecological and social projects can serve
as a substitute for weaker country-level governance. The environment and social scores also have
a significant negative impact on the cost of equity and the cost of debt in countries with a weak
legal environment, while firms with a high environmental and/or social score can obtain more
leverage in countries with weaker legal protection. In contrast, the governance score seems to
have a significant positive impact on the WACC, the cost of equity, the cost of debt and leverage.
The impact on the cost of equity and the cost of debt is, however, significantly negative for firms
in a weaker level environment.
The remainder of this paper is organized as follows. Section 2 provides a detailed
literature review and outlines our hypotheses, while Section 3 outlines our research
design and methodology, including a discussion of the sample and the variables. Section
4 provides summary statistics, while Section 5 entails a detailed review of our regression
outcomes. Section 6 discusses our performedsensitivity checks, while Section 7 concludes
and provides future research topics and policy advice.
SAMPJ 2. Literature review and hypotheses
15,3 In this section of the article, we provide arguments supporting our claim that firms with a
higher ESG score have a lower cost of capital. First, a higher ESG score could reduce
information asymmetries, as firms can use this score to signal to external financiers that they
are a high-quality firm (see, e.g. Dhaliwal et al., 2011). If investors believe that they are better
informed, they are likely to reduce their expected return. That is, investors and financial
680 analysts typically take improved ESG factors into account when granting funds or providing
positive recommendations, and the more likely that the firm is behaving decently from an
ESG perspective, the more eager financiers could be to provide financing at a lower cost (see,
e.g. Sharfman and Fernando, 2008). According to Bansal (2005), firms engaging in better
environmental risk management are also more visible and are publicly mentioned in the
media, thereby again attracting more investors at a lower cost.
Second, companies that have a higher ESG score mitigate the risk of litigation (see, e.g.
King and Shaver, 2001). Investors indeed have more information to identify whether certain
risks, such as oil spills, product recalls, accounting fraud or radiation, are lower in cases of a
higher ESG score. For high-ESG firms, potential investors might be more certain that the
profit of the company will be directed strategically to dividends, debt payments or internal
investments rather than to undesirable litigation costs. Because of the reduced risk
perception, investors might also be less likely to quickly sell these stocks in case of an
economic downturn, leading to reduced volatility of the firm’s stock as measured by its beta.
In addition to fewer adverse selection problems, companies with strong ESG disclosure
typically also have strong corporate governance in place, leading to a reduction in perceived
risk for the firm with a negative impact on the company’s cost of capital (see also Ashbaugh
et al., 2004; Pham et al., 2020).
Sharfman and Fernando (2008) argue that the relationship between the cost of capital
and environmental risk management is negative because of the types of investors that green
firms attract. Green investors might only be willing to invest in firms with higher ESG
scores. This results in companies having a higher ESG score to be capable of attracting more
investors at a lower cost (see also Mackey et al., 2007; Ramirez et al., 2022; Hong and
Kacperczyk, 2009). Petersen and Vredenburg (2009) document that the majority of
institutional investors now prefer high ESG firms, illustrating that high ESG scores can help
firms obtain a wider range of investors. Also, lenders are increasingly incorporating
environmental issues into their lending decisions. Based on the aforementioned arguments,
we formulate the following hypothesis:
H1. The coefficient of firms’ ESG score on their cost of capital will be significantly negative.
In this article, we also hypothesize that the negative impact of the ESG score on the cost of
capital prevails mainly in countries with a weaker legal environment, suggesting a
substitution effect. That is, in countries unable to protect the accuracy of disclosed
information or where the quality of political institutions is low, financiers might be more
concerned with a firm’s downside risk (see, e.g. Ge et al., 2012; Zhu, 2014). According to
institutional theory (e.g. DiMaggio and Powell, 1983; Mizruchi and Fein, 1999), organizations
must incorporate institutional rules to achieve legitimacy and their survival. In cases where
the institutional rules are thus of weaker quality, their internal controls have to increase,
which is costly. To attract financing at a lower cost, firms domiciled in these countries might
compensate by investing heavily in ESG projects and disclosure to convince financiers (e.g.
Klapper and Love, 2004; Durnev and Kim, 2005). In countries with weaker legal institutions,
ESG laws could be less enforced, but financiers might still be concerned that when the
company faces claims because of social or environmental violations, they will be less
protected in countries with weaker legal systems (see e.g. Durnev and Kim, 2005). The impact of
Shareholders are also heavily concerned with the quality of firm-level governance to a firm’s ESG
constrain the moral hazard problems of insider management. In countries with weaker legal
institutions associated with less independent judicial systems, firms could find it optimal to
score
invest more in ESG to increase their creditability (see, e.g. Aggarwal et al., 2009). Creditors
are also concerned by shareholders exchanging low-risk assets for high-risk investments,
which could be more prevalent in cases of poor legal institutions. To attract equity financing
at a lower cost, strong firm-level governance mechanisms can be put in place to restrict 681
insider expropriation (John et al., 2008).
Not only is it worthwhile to increase the governance and/or social component of the ESG
score, but also the environmental score in countries with lower investor protection. That is, a
firm taking care of the environment could signal its superior quality and engagement, which
is especially relevant when overall investor protection is limited. Investor preferences may
have shifted in recent years, with them worrying more about climate-related financial
hazards, fueling an increase in the importance placed on sustainability risk when evaluating
a company (Eccles and Klimenko, 2019). Firm-level disclosures on ESG could reduce
information asymmetries between the firm and its investors. If creditors or shareholders can
verify that the firm is ecological, they might be less concerned about ecological violations,
which is of more relevance in countries where the rule of law is less strong. Based on the
aforementioned arguments, we postulate the following hypothesis:
H2. A firm’s ESG score negatively impacts its cost of capital, especially in countries
with a weaker legal environment.
3. Sample, variables and model

Our sample consists of companies that are part of the STOXX Europe 600 Index over the period
2018–2021. Our sample is thus composed of 600 companies, including large, mid and small
capitalization firms listed across 17 countries of the European continent: Austria, Belgium,
Denmark, Finland, France, Germany, Ireland, Italy, Luxembourg, The Netherlands, Norway,
Poland, Portugal, Spain, Sweden, Switzerland and the UK. We thus entail common law as well as
civil law countries in our sample. This STOXX Europe 600 Index is globally recognized by
institutional investors and provides the broadest proxy for the European economy. In line with
previous research, such as Johnson (2020), we exclude companies operating in the financial sector
from the sample set, as these issuers are subject to a different EU regulatory framework
compared to other firms. Our sample finally includes 1,960 firm-year observations.
To test whether the ESG score has a negative impact on the cost of capital of European
firms, we follow Sharman and Fernando (2008), Khanchel and Lassoued (2022) and Johnson
(2020) and retrieve from Bloomberg the WACC, the cost of equity, the cost of debt, the beta
and the leverage of the firm as dependent variables. Bloomberg calculates the WACC by
applying the following formula:

EQUITY
WACC ¼ COSTOFEQUITY
LEVERAGE þ EQUITY
LEVERAGE
þ COSTOFDEBT ð1 T Þ
LEVERAGE þ EQUITY
where EQUITY represents the market value of the firm’s equity and LEVERAGE
represents the market value of the firm’s debt. EQUITY is found by Bloomberg by using the
SAMPJ total market capitalization divided by the debt plus market capitalization. LEVERAGE is
15,3 taken from its last financial reporting and is calculated as the ratio of long-term outstanding
debt divided by total assets reported by the firm. COSTOFEQUITY equals the firm’s cost of
equity capital, while COSTOFDEBT is the firm’s cost of debt capital. T stands for the firm’s
rate of corporate taxation. The cost of equity capital is estimated by Bloomberg using the
CAPM, which equals the cost of equity of a firm to the risk-free interest rate plus the firm’s
682 beta times the market risk premium:

COSTOFEQUITY ¼ rf þ BETA RM rf
where rf is the risk-free rate, RM is the return on the market portfolio and BETA measures
the firm’s systematic risk and is calculated on a weekly basis by Bloomberg as the
covariance between the return on equity of the firm and the market return divided by the
variance of the market return. Bloomberg uses the local country’s 10-year government bond
yield as a proxy for the current risk-free rate (Rf). BETA is estimated by Bloomberg using
the market model and regression analysis versus the country’s blue-chip index, over a
period of two years using weekly returns data. The cost of debt is the firm’s marginal cost of
borrowing, calculated as the interest paid during a given financial year and expressed as a
percentage of the total interest-bearing debt.
The main independent variables, namely, the ESG scores, are provided by Refinitiv,
following many academic studies, such as Albuquerque et al. (2020), Bae et al. (2020),
Demers et al. (2021), Mahmut et al. (2022), Dyck et al. (2019), Gonçales et al. (2022) and
Ramirez et al. (2022). Refinitiv offers one of the most comprehensive ESG databases,
covering over 85% of the global market across more than 630 different ESG metrics. That is,
ESG metrics like the usage of resources, emissions and innovations are included to calculate
the environmental score, while metrics on the workforce, human rights, community and
product responsibility are used to develop the social score. Metrics on management,
shareholders and corporate social responsibility serve as input for the governance score.
The environmental (ENVIRON), social (SOCIAL) and governance (GOVER) scores are then
aggregated into an ESG score. The input for4 all ESG metrics comes from the firms’ annual
reports, company websites, NGO websites, stock exchange filings, CSR reports and news
sources. Refinitiv also performs around 400 error checks in the data collection tool and runs
around 300 automated quality checks on the outcome together with independent audits to
ensure a high-quality ESG score. We take the natural logarithm of the various ESG scores.
A potential endogeneity effect might be present given that companies that increase
their leverage might also start disclosing more ESG information because of the increased
scrutiny from financial institutions and an increase in debt covenants (Atan et al., 2018).
Also, any cost of capital might be a driver of the ESG score because companies with a
high cost of capital might be more eager to have it reduced by investing in ESG projects.
To address this endogeneity effect, we follow Sharfman and Fernando (2008), Dhaliwal
et al. (2011) and Ng and Rezaee (2015) by lagging the ESG factors and the control
variables by one year in our panel dataset in addition to various robustness checks (see
infra) [9].
To take the quality of the legal system of the country into consideration, we rely on the
Worldwide Governance Indicators (WGI) of the World Bank. These indicators focus on
six dimensions of governance: voice of accountability, political stability and absence of
violence/terrorism, government effectiveness, regulatory quality, rule of law and control
of corruption. These six aggregate indicators combine the views of a large number of
enterprise, expert and citizen survey respondents. They are based on over 30 individual
data sources produced by a variety of survey institutions, NGOs, think tanks, private The impact of
sector firms and international organizations. The WGIs were selected for this article a firm’s ESG
given that they do not only focus on investor rights in a narrow sense but are also related
to topics like human rights, freedom of association, quality of bureaucracy, political
score
stability, investment freedom, fairness of the judicial process, property rights and
corruption. Hence, the indicators are also related to social and environmental topics and
not only to governance issues. The average value of the six WGIs is used in our
regression model (LEGALENV). 683
In line with previous research, our study controls for several variables. Bloomberg was
used for the data retrieval process, together with a manual screening of the companies’
annual accounts where the data provided by Bloomberg was incomplete. First, we control
for the size (SIZE) of the firm, as larger firms may be under greater scrutiny by the public
(Durnev and Kim, 2005). SIZE is calculated as the natural logarithm of the market
capitalization of the firm, which is the number of shares outstanding multiplied by the
current share price. Second, we control for the free float of a firm (FREE FLOAT), calculated
as the percentage of the outstanding shares not held by insiders. As documented by Huo
et al. (2021), the absence of large controlling shareholders might lead to more agency
problems, potentially resulting in a higher cost of capital. Third, we control for a firm’s
financial leverage (LEVERAGE), calculated as long-term debt divided by total assets when
leverage is not the dependent variable. The reason is that companies with a higher leverage
ratio might face more bankruptcy risks, leading to a higher cost of capital. Fourth, we
include the return on assets (ROA) as a proxy for a firm’s profitability, given that more
profitable companies are more likely to repay their debt or provide dividends, resulting in a
lower cost of capital. Fifth, we control for the firms’ market-to-book (MTB) value as a
positive relationship exists between the MTB ratio of a company and its expected return
(see, e.g. Fama and French, 1992). Finally, we include year dummies as fixed effects (i.e.
Y2019, Y2020 and Y2021) in our base panel regression model, where Y2018 is the reference
category:
WACC ¼ b0 þ b1 ESG þ b2 LEGALENV þ b3 SIZE þ b4 FREE FLOAT

þ b5 LEVERAGE þ b6 ROA þ b7 MTB þ b8 Y2019 þ b9 2020 þ b10 2021 þ «
A panel data approach has the advantage over a cross-sectional analysis in that it gives
more information with less collinearity amongst the variables, can control for individual
heterogeneity, has more degrees of freedom and is more efficienct. To analyse whether the
ESG score matters mainly for firms being domiciled in a country with a weaker legal
environment, we create a dummy variable based on LEGALENV (i.e. LEGAL) for
interpretation reasons, having a value of one in case LEGALENV is larger than the median
and zero otherwise, and create an interaction term with ESG:
WACC ¼ b0 þ b1 ESG þ b2 LEGAL þ b3 ESG * LEGAL þ b4 SIZE þ b5 FREE FLOAT

þ b6 LEVERAGE þ b7 ROA þ b8 MTB þ b9 Y2019 þ b10 2020 þ b11 2021 þ «
Table 1 displays the geographical distribution of the sample together with their average
WGI score. Most of the firms in our sample are domiciled in the UK, followed by France,
Germany and Sweden. In terms of the legal environment, Finland scores best, followed by
Norway, Switzerland and Denmark. The countries having the lowest WGI scores are Italy,
Poland and Luxembourg.
SAMPJ Country N Aggregated WGI score
15,3
Austria 24 1.4333
Belgium 48 1.1917
Denmark 80 1.7042
Finland 64 1.7792
France 260 1.0875
684 Germany 244 1.4417
Ireland 40 1.3917
Italy 76 0.5333
Luxembourg 24 1.6958
The Netherlands 116 1.6250
Norway 52 1.7583
Poland 20 0.5958
Portugal 12 1.0250
Spain 80 0.8083
Sweden 224 1.6458
Switzerland 172 1.7208
UK 424 1.3292
Table 1.
Total 1960
Geographical
distribution of the Note: This table displays the distribution of the firm-year observations over the period 2018–2021
sample Source: Authors’ own work
4. Summary statistics
Table 2 reports summary statistics on the dependent and independent variables.
To limit the influence of outliers, we winsorized variables at 5%–95%. To facilitate the
reading of the table, Table 2 displays the results in absolute values (i.e. before the
logarithmic transformation).
We observe that the average value of WACC equals 8.065. The average cost of equity
equals 10.523, while the cost of debt averages 0.421. The average BETA equals 0.933, and
the average firm in our sample has a total debt to total assets ratio (LEVERAGE) of 22.40%.
As for our main variables of interest, the average ESG score equals 67.871 with the ESG
scores being of similar values (i.e. 70.504, 71.504 and 64.771, respectively). As for the control
variables, the average WGI sore (LEGALENV) equals 1.381 and SIZE averages
9,248,760,000 EUR. The average free float of firms in our sample equals 77.893%, and firms
have a return on assets of 6.333. The MTB variable averages 4.203.
5. Multivariate results
Table 3 displays pairwise correlations among the various continuous explanatory variables.
As expected, the correlations between the various ESG indicators are large, and these
variables will therefore not be included in the same regression models. The other correlation
coefficients are smaller than 0.60, which allows us to assume that there are no further
multicollinearity issues when including these explanatory variables together in the
regression models.
Table 4 reports the outcome of the multivariate panel regression models. Column 1
displays the results of our baseline model. Columns 3, 5, 7 and 9 report the results of the
same explanatory variables on the components of the WACC. In Columns 2, 4, 6, 8 and 10,
LEGALENV is replaced by its dummy LEGAL, and the interaction term with LEGALENV
is included to detect whether the influence of the ESG score on the cost of capital matters
Variable Mean Median SD Minimum Maximum
The impact of
a firm’s ESG
WACC 8.065 7.820 2.727 3.581 13.738 score
COSTOFEQUITY 10.523 10.130 2.829 6.205 16.745
COSTOFDEBT 0.421 0.240 0.593 0.132 1.742
BETA 0.933 0.920 0.204 0.584 1.335
LEVERAGE 0.224 0.211 0.123 0.021 0.478
ESG 67.871 71.006 0.789 9.442 95.638 685
ENVIRON 70.504 74.889 2.651 1.347 97.294
SOCIAL 71.504 75.889 1.652 2.347 98.294
GOVER 64.771 68.238 0.981 4.527 98.589
LEGALENV 1.381 1.417 0.313 0.483 1.817
SIZE 9,248,760,000 8,121,294,000 2,955,000 159,532,000 331,785,754,000
FREE FLOAT 77.893 84.110 21.748 1.874 100.000
ROA 6.333 5.310 4.737 0.475 18.092
MTB 4.203 2.850 3.537 0.782 14.089
Notes: This table reports summary statistics and univariate results for the dependent and independent
variables. All explanatory variables are winsorized at 5%95% to remove extreme values in either tail of
the distribution. WACC represents the weighted average cost of capital. COSTOFEQUITY represents the
cost of equity capital based on the CAPM. COSTOFDEBT indicates the firm’s cost of debt capital. BETA
measures the firm’s systematic risk. LEVERAGE is the ratio of long-term outstanding debt divided by total
assets. ESG is the natural logarithm of the ESG score. ENVIRON is the natural logarithm of the
environmental score. SOCIAL is the natural logarithm of the social score. GOVER is the natural logarithm
of the governance score. LEGALENV is the average value of the six WGIs. SIZE represents the natural Table 2.
logarithm of market capitalization. In this table, the results of the variables before the log transformation
are displayed to facilitate interpretation. FREE FLOAT is the percentage of total outstanding shares not Univariate analysis
held by insiders. ROA is the return on assets. MTB is the market-to-book value of the exploratory
Source: Authors’ own work variables
more in countries with a weaker legal environment. A dummy variable representing the
legal environment of the country in which the firm is domiciled is preferred over a
continuous variable for ease of interpretation.
The results in Table 4 reveal that the ESG score has a significant negative impact on the
WACC. This effect seems to matter only for countries with a LEGALENV score below the
mean, suggesting that the ESG score of a firm and its legal environment can act as
substitutes. This effect is also economically significant given that a one standard deviation
change in the ESG score results in a decrease of the cost of capital by 4.79% [10]. The ESG
score does not seem to have a significant impact on the cost of equity, the cost of debt and
the beta. Table 4 documents that for countries having weaker legal institutions, the impact
of the ESG score on the cost of debt is significantly negative.
Concerning the control variables, LEGAL seems to have a significant positive impact on
the WACC, a significant negative impact on the cost of debt and leverage, and a significant
negative impact on leverage. We also see that LEGAL positively impacts beta. In addition,
SIZE has a significant negative impact on the WACC and the cost of equity. Qualitatively
similar results are obtained when the natural logarithm of the number of employees is used
as a proxy for the size of the firm or the natural logarithm of total assets. FREE FLOAT has
a significant positive impact on the cost of capital, the cost of equity, the cost of debt, beta
and leverage. It thus seems that firms with a more dispersed shareholder structure can
obtain more leverage but also contain more systematic risk, resulting in a higher cost of
capital. Furthermore, ROA has a significant positive impact on the WACC and the cost of
debt, while having a significant negative impact on the cost of equity, beta and leverage.
15,3
686
Table 3.
SAMPJ
Correlation matrix
1. ESG 2. ENVIRON 3. SOCIAL 4. GOVER 5. LEGALENV
1 1.0000
2 0.8727*** (<0.0001) 1.0000
3 0.8777*** (<0.0001) 0.9992*** (<0.0001) 1.0000
4 0.6306*** (<0.0001) 0.3460*** (<0.0001) 0.3491*** (<0.0001) 1.0000
5 0.0926*** (<0.0001) 0.0908*** (<0.0001) 0.0914*** (<0.0001) 0.0186 (0.4155) 1.0000
6 0.4390*** (<0.0001) 0.3938*** (<0.0001) 0.4012*** (<0.0001) 0.2144*** (<0.0001) 0.0745*** (<0.0001)
7 0.0966*** (<0.0001) 0.0371 (0.1045) 0.0384* (0.0924) 0.2857*** (<0.0001) 0.1499*** (<0.0001)
8 0.1741*** (<0.0001) 0.1461*** (<0.0001) 0.1476*** (<0.0001) 0.0867*** (0.0001) 0.1802*** (<0.0001)
9 0.2016*** (<0.0001) 0.1426*** (<0.0001) 0.1441*** (<0.0001) 0.1065*** (<0.0001) 0.1478*** (<0.0001)
10 0.1141*** (<0.0001) 0.0791*** (0.0006) 0.0783*** (0.0006) 0.1675*** (<0.0001) 0.1862*** (<0.0001)
Notes: This table displays pairwise correlations among the continuous variables. ESG is the natural logarithm of the ESG score. ENVIRON is the natural
logarithm of the environmental score. SOCIAL is the natural logarithm of the social score. GOVER is the natural logarithm of the governance score. LEGALENV
is the average value of the six WGI’s. SIZE represents the natural logarithm of the market capitalization. FREE FLOAT is the percentage of total outstanding
shares not held by insiders. ROA is the return on assets. MTB is the market-to-book value. All explanatory variables are winsorized at 5%–95% to remove
extreme values in either tail of the distribution. p-values are reported between parentheses. *p < 0.10; **p < 0.05; ***p < 0.01
Source: Authors’ own work
(continued)
6. SIZE 7. FREE FLOAT 8. ROA 9. MTB 10. LEVERAGE
1
2
3
4
5
6 1.0000
7 0.1086*** (<0.0001) 1.0000
8 0.0012 (0.9589) 0.1086*** (<0.0001) 1.0000
9 0.0642*** (0.0043) 0.0546** (0.0150) 0.5880*** (<0.0001) 1.0000
10 0.0486** (0.0307) 0.0863*** (0.0001) 0.0486** (0.0307) 0.0436* (0.0524) 1.0000
Table 3.
score
687
The impact of
a firm’s ESG
15,3
688
Table 4.
SAMPJ
Multivariate
the impact of ESG

regression analyses:
Baseline model (1) Model (2) Model (3) Model (4) Model (5) Model (6)
Dependent variable WACC WACC COSTOFEQUITY COSTOFEQUITY COSTOFDEBT COSTOFDEBT
Intercept 7.8017*** (<0.0001) 6.0456*** (<0.0001) 10.2136*** (<0.0001) 9.5384*** (<0.0001) 1.1517*** (<0.0001) 0.1956 (0.5167)
ESG 0.4286** (0.0381) 0.1165 (0.6706) 0.0123 (0.9585) 0.1709 (0.5875) 0.0024 (0.7751) 0.1663*** (0.0067)
LEGALENV/LEGAL 0.5183*** (0.0036) 4.4679*** (0.0024) 0.0489 (0.8109) 1.1883 (0.4823) 0.6559*** (<0.0001) 1.4347*** (<0.0001)
LEGAL ESG 1.1185*** (0.0015) 0.3091 (0.4447) 0.2425*** (0.0022)
SIZE 0.1181** (0.0391) 0.1125** (0.0495) 0.2077*** (0.0016) 0.2039*** (0.0019) 0.0037 (0.7751) 0.0068 (0.5979)
FREE FLOAT 0.8302*** (<0.0001) 0.8829*** (<0.0001) 0.8869*** (<0.0001) 0.8723*** (<0.0001) 0.0981*** (0.0029) 0.0003 (0.9928)
ROA 0.0701*** (<0.0001) 0.0684*** (<0.0001) 0.0402** (0.0172) 0.0416** (0.0138) 0.0083** (0.0120) 0.0076** (0.0218)
MTB 0.1223*** (<0.0001) 0.1257*** (<0.0001) 0.0458** (0.0407) 0.0477** (0.0332) 0.0137*** (0.0018) 0.0121*** (0.0058)
LEVERAGE 0.0686*** (<0.0001) 0.0695*** (<0.0001) 0.0126** (0.0181) 0.01165** (0.0276) 0.0053*** (<0.0001) 0.0059*** (<0.0001)
Year dummies YES YES YES YES YES YES
Adjusted R-square 0.2742 0.2756 0.1084 0.1084 0.2259 0.2366
Number of observations 1,905 1,904 1,905 1,904 1,905 1,904
Notes: This table displays the results of the multivariate panel regressions. WACC represents the weighted average cost of capital. COSTOFEQUITY represents
the cost of equity capital based on the CAPM. COSTOFDEBT indicates the firm’s cost of debt capital. BETA measures the firm’s systematic risk. LEVERAGE is
the ratio of long-term outstanding debt divided by total assets. ESG is the natural logarithm of the ESG score. ENVIRON is the natural logarithm of the
environmental score. SOCIAL is the natural logarithm of the social score. GOVER is the natural logarithm of the governance score. LEGALENV is the average
value of the six WGIs. SIZE represents the natural logarithm of the market capitalization. FREE FLOAT is the percentage of total outstanding shares not held by
insiders. ROA is the return on assets. MTB is the market-to-book value. All explanatory variables are winsorized at 5%–95% to remove extreme values in either
tail of the distribution. p-Values are reported between parentheses. *p < 0.10; **p < 0.05; ***p < 0.01
(continued)
Model (7) Model (8) Model (9) Model (10)
Dependent variable BETA BETA LEVERAGE LEVERAGE
Intercept 0.4426*** (<0.0001) 0.4977*** (<0.0001) 1.9829 (0.7240) 1.9116 (0.7750)

ESG 0.0217 (0.2158) 0.0204 (0.3800) 2.6005** (0.0111) 1.9443 (0.1550)
LEGALENV/LEGAL 0.0466*** (0.0021) 0.0253 (0.8390) 6.7650*** (<0.0001) 5.3597 (0.4650)
LEGAL ESG 0.0033 (0.9130) 2.0961 (0.2320)
SIZE 0.0019 (0.6821) 0.0029 (0.6090) 0.0418 (0.8829) 0.0099 (0.9720)
FREE FLOAT 0.0752*** (<0.0001) 0.0817*** (<0.0001) 4.6263*** (<0.0001) 3.7378*** (<0.0001)
ROA 0.0052*** (<0.0001) 0.0053*** (<0.0001) 0.8665*** (<0.0001) 0.8786*** (<0.0001)
MTB 0.0008 (0.6215) 0.00107 (0.5180) 0.7214*** (<0.0001) 0.7198*** (<0.0001)
LEVERAGE 0.00194*** (<0.0001) 0.0019*** (<0.0001)
Year dummies YES YES YES YES
Adjusted R-square 0.0775 0.0806 0.1286 0.1186
Number of observations 1,905 1,904 1,906 1,905
Table 4.
score
689
The impact of
a firm’s ESG
SAMPJ These results are somewhat counterintuitive, as we would expect that more profitable firms
15,3 have a lower default risk and can thus obtain more debt at a cheaper price (e.g. Myers and
Majluf, 1984), while they can also easily provide dividends and should thus obtain equity
financing easier. We examined the interaction effect between ROA and the ESG score to see
whether the presence of both financial and non-financial disclosure strengthens the impact
on the cost of capital, but we could not find any significant effect. The MTB has a significant
690 positive impact on the WACC, which is because of the significant positive impact on
leverage, as the MTB has a significant negative impact on the cost of equity, the cost of debt
and the beta. Finally, LEVERAGE negatively impacts the WACC, the cost of equity and the
beta, while positively impacting the cost of debt. When leverage increases, agency problems
of equity could be reduced because of the disciplinary effect of debt (Jensen, 1986), leading to
a lower cost of equity, while an increase in leverage would increase default risk, thereby
positively impacting the cost of debt.
Tables 5–7 focus on the impact of the individual ESG components, namely, the
environment score, the social score and the governance score. Examining these three tables
together, one can see that the ENVIRON and SOCIAL have a significantly negative impact
on the WACC, but only in countries with a weaker legal environment, suggesting once more
that investments in ecological and social projects can serve as a substitute for country-level
governance. The environment and social scores also have a significant negative impact on
the cost of equity and the cost of debt in countries with a weak legal environment. Firms
with a high environmental and/or social score can obtain more leverage in countries offering
weaker legal protection. In contrast, the governance score seems to have a significant
positive impact on the WACC, the cost of equity, the cost of debt and leverage. The impact
on the cost of equity and the cost of debt is, however, significantly negative for firms with a
weaker legal environment.
6. Sensitivity tests
As a first sensitivity check, we clustered the standard errors based on the year, industry
and/or country of the firm instead of running pooled OLS regression models with year-fixed
effects. The results are qualitatively similar. Also, random effects generalized least squares
(GLS) models with standard errors that account for intra-group correlations were executed.
The results allow us to draw similar conclusions [11].
Second, we replace LEGALENV with a dummy variable indicating whether the firm is
located in a common law vs a civil law system, which is equivalent to comparing the UK and
non-UK firms in our sample. According to La Porta and Lopez-de-Silanes (1998), Djankov
et al. (2002) and Mulligan and Shleifer (2005), legal rules protecting investors vary
fundamentally among legal traditions or origins. Common-law countries (originally called
English law countries) afford the best legal protection to shareholders with lower formalism
of judicial procedures and greater judicial independence compared to civil-law countries
having greater corruption, a larger unofficial economy and higher unemployment. Our
dummy variable captures many underling institutions and outcomes such as procedural
formalism, judicial independence, property rights, level of corruption, labor laws, company
laws, securities laws, stock market developments, ownership structures, bankruptcy laws
and government ownership of banks (see La Porta et al., 2008). Yet, we do not find a
significant impact of this variable on our dependent variable, most likely because we only
have one common-law country (i.e. the UK) in our sample. Also, when splitting the sample
into common law vs civil law countries, we did not seem to find significantly different
results between the two subsamples. Also, whether the economy of the corporation is bank-
oriented or market-oriented does not significantly matter.
Intercept 7.5026*** (<0.0001) 5.9489*** (<0.0001) 10.3071*** (<0.0001) 9.0249*** (<0.0001) 1.1693*** (<0.0001) 0.0222 (0.9368)
ENVIRON 0.2876* (0.0599) 0.2320 (0.2777) 0.0690 (0.6880) 0.2438 (0.3215) 0.0117 (0.7301) 0.1131** (0.0186)
LEGALENV/LEGAL 0.5151*** (0.0038) 3.9018*** (0.0007) 0.0572 (0.7797) 2.2797* (0.0853) 0.6571*** (<0.0001) 0.9966*** (0.0001)
LEGAL ENVIRON 0.9786*** (<0.0001) 0.5678* (0.0712) 0.1366** (0.0266)
SIZE 0.1322** (0.0168) 0.1267** (0.0223) 0.1967*** (0.0020) 0.1911*** (0.0027) 0.0017 (0.5914) 0.0075 (0.5496)
FREE FLOAT 0.8147*** (<0.0001) 0.8396*** (<0.0001) 0.9057*** (<0.0001) 0.8686*** (<0.0001) 0.1008*** (0.0019) 0.0016 (0.9591)
ROA 0.0696*** (<0.0001) 0.0679*** (<0.0001) 0.0406** (0.0164) 0.0427** (0.0116) 0.0083** (0.0126) 0.0079** (00169)
MTB 0.1259*** (<0.0001) 0.1309*** (<0.0001) 0.0467** (0.0337) 0.0475** (0.0319) 0.0139*** (0.0014) 0.0121*** (0.0051)
LEVERAGE 0.0690*** (<0.0001) 0.0692*** (<0.0001) 0.0126** (0.01804) 0.01114** (0.0349) 0.0053*** (<0.0001) 0.0059*** (<0.0001)
Number of observations 1907 1906 1907 1906 1907 1906
tail of the distribution. p-values are reported between parentheses. *p < 0.10; **p < 0.05; ***p < 0.01
(continued)
Table 5.
score
environment score
the impact of the
691
The impact of
Multivariate
a firm’s ESG
15,3
692
Table 5.
SAMPJ

Intercept 0.4542*** (<0.0001) 0.4686*** (<0.0001) 5.1765 (0.3440) 4.6467 (0.4532)

ENVIRON 0.0141 (0.2712) 0.0222 (0.2200) 0.8249 (0.2686) 0.7090 (0.5103)
LEGALENV/LEGAL 0.0463*** (0.0022) 0.0529 (0.5890) 6.8167*** (<0.0001) 11.5405** (0.0446)
LEGAL ENVIRON 0.0217 (0.3480) 3.5629*** (0.0091)
SIZE 0.0026 (0.5741) 0.00035 (0.4690) 0.2613 (0.3411) 0.2082 (0.4508)
FREE FLOAT 0.0774*** (<0.0001) 0.0827*** (<0.0001) 4.8158*** (<0.0001) 4.0587*** (<0.0001)
ROA 0.0052*** (<0.0001) 0.0053*** (<0.0001) 0.8699*** (<0.0001) 0.8745*** (<0.0001)
MTB 0.0009 (0.5438) 0.0018 (0.4720) 0.6886*** (<0.0001) 0.6753*** (<0.0001)
LEVERAGE 0.0019*** (<0.0001) 0.0019*** (<0.0001)
Number of observations 1907 1906 1908 1907
Intercept 7.5471*** (<0.0001) 5.8857*** (<0.0001) 10.3106*** (<0.0001) 8.9679*** (<0.0001) 1.1737*** (<0.0001) 0.0118 (0.9669)
SOCIAL 0.2974* (0.0588) 0.2418 (0.2826) 0.0683 (0.7057) 0.2586 (0.3169) 0.0139 (0.6955) 0.1211** (0.0166)
LEGALENV/LEGAL 0.5148*** (0.0039) 0.1251** (0.0247) 0.0571 (0.7803) 2.3745* (0.0872) 0.6572*** (<0.0001) 1.0478*** (0.0001)
LEGAL SOCIAL 1.0167*** (<0.0001) 0.5879* (0.0735) 0.1482** (0.0214)
SIZE 0.1311** (0.0183) 0.1251** (0.0247) 0.1967*** (0.0021) 0.1916*** (0.0027) 0.0014 (0.9098) 0.0074 (0.5518)
FREE FLOAT 0.8157*** (<0.0001) 0.8397*** (<0.0001) 0.9056*** (<0.0001) 0.8681*** (<0.0001) 0.1009*** (0.0019) 0.0012 (0.9706)
ROA 0.0691*** (<0.0001) 0.0680*** (<0.0001) 0.0406** (0.0164) 0.0426** (0.0116) 0.0083** (0.0127) 0.0079** (0.0170)
MTB 0.1259*** (<0.0001) 0.1306*** (<0.0001) 0.0468)** (0.0339) 0.0475** (0.0318) 0.0139*** (0.0014) 0.0121*** (0.0051)
LEVERAGE 0.0691*** (<0.0001) 0.0692*** (<0.0001) 0.0126** (0.0179) 0.0111** (0.0348) 0.0053*** (<0.0001) 0.0059*** (<0.0001)
(continued)
Table 6.
score
social score
the impact of the
693
The impact of
Multivariate
a firm’s ESG
15,3
694
Table 6.
SAMPJ

Intercept 0.4513*** (<0.0001) 0.4697*** (<0.0001) 5.1521 (0.3485) 5.1813 (0.4118)

SOCIAL 0.0152 (0.2555) 0.0234 (0.2180) 0.8024 (0.3043) 0.8471 (0.4497)
LEGALENV/LEGAL 0.0463*** (0.0022) 0.0547 (0.5940) 6.8198*** (<0.0001) 12.6014** (0.0364)
LEGAL SOCIAL 0.0221 (0.3620) 3.8002*** (0.0076)
SIZE 0.0025 (0.5933) 0.0033 (0.4840) 0.2675 (0.3319) 0.2118 (0.4449)
FREE FLOAT 0.0773*** (<0.0001) 0.0827*** (<0.0001) 4.8190*** (<0.0001) 0.8747*** (<0.0001)
ROA 0.0052*** (<0.0001) 0.0053*** (<0.0001) 0.8702*** (<0.0001) 0.2118 (0.4449)
MTB 0.0009 (0.5471) 0.0011 (0.4740) 0.6879*** (<0.0001) 0.6749*** (<0.0001)
LEVERAGE 0.0019*** (<0.0001) 0.0018*** (<0.0001)
Baseline
Model (1) Model (2) Model (3) Model (4) Model (5) Model (6)
Intercept 6.7638*** (<0.0001) 8.1073*** (<0.0001) 9.7879*** (<0.0001) 11.3331*** (<0.0001) 1.0655*** (<0.0001) 0.0570 (0.8397)
GOVER 0.2550* (0.0897) 0.1044 (0.6022) 0.3433** (0.0467) 0.0112 (0.9609) 0.0714** (0.0357) 0.1086** (0.0158)
LEGALENV/LEGAL 0.5192*** (0.0034) 1.5702 (0.1607) 0.0683 (0.7381) 2.8617** (0.0267) 0.6594*** (<0.0001) 0.8648*** (<0.0001)
LEGAL GOVER 0.3371 (0.2148) 0.6748** (0.0302) 0.1078* (0.0776)
SIZE 0.1975*** (0.0002) 0.2030*** (0.0001) 0.2377*** (<0.0001) 0.2367*** (<0.0001) 0.0098 (0.4044) 0.0071 (0.5428)
FREE FLOAT 0.7151*** (<0.0001) 0.7578*** (<0.0001) 0.7981*** (<0.0001) 0.7389*** (<0.0001) 0.0787** (0.0203) 0.0022 (0.9474)
ROA 0.0706*** (<0.0001) 0.0719*** (<0.0001) 0.0406** (0.0167) 0.0406** (0.0160) 0.0083** (0.0127) 0.0078** (0.0171)
MTB 0.1335*** (<0.0001) 0.1359*** (<0.0001) 0.0412* (0.0617) 0.0437** (0.0475) 0.0128*** (0.0032) 0.0124*** (0.0039)
LEVERAGE 0.0703*** (<0.0001) 0.0716*** (<0.0001) 0.0139*** (0.0089) 0.0131** (0.0133) 0.0049*** (<0.0001) 0.0056*** (<0.0001)
(continued)
Table 7.
score
governance score
the impact of the
695
The impact of
Multivariate
a firm’s ESG
15,3
696
Table 7.
SAMPJ

Intercept 0.4643*** (<0.0001) 0.5567*** (<0.0001) 1.3637 (0.8000) 5.8050 (0.3505)

GOVER 0.0095 (0.4578) 0.0025 (0.8810) 4.1316*** (<0.0001) 3.9039*** (<0.0001)
LEGALENV/LEGAL 0.0451*** (0.0029) 0.1048 (0.2690) 6.9313*** (<0.0001) 2.4245 (0.6619)
LEGAL GOVER 0.0161 (0.4830) 0.2244 (0.8675)
SIZE 0.0039 (0.3791) 0.0038 (0.3682) 0.01006 (0.9690) 0.0567 (0.8271)
FREE FLOAT 0.0758*** (<0.0001) 0.0803*** (<0.0001) 3.5867*** (<0.0001) 2.7129*** (<0.0001)
ROA 0.0053*** (<0.0001) 0.0053*** (<0.0001) 0.8641*** (<0.0001) 0.8447*** (<0.0001)
MTB 0.0011 (0.5135) 0.0017 (0.4360) 0.7227*** (<0.0001) 0.7148*** (<0.001)
LEVERAGE 0.0019*** (<0.0001) 0.0019*** (<0.0001)
Finally, a potential endogeneity effect might be present given that companies that increase The impact of
their leverage might also start disclosing more ESG information because of the increased a firm’s ESG
scrutiny from financial institutions (Atan et al., 2018). Also, any cost of capital might be a
driver of the ESG score because companies with a high cost of capital might be more eager
score
to have it reduced by investing in ESG projects. To address this endogeneity effect, we
already followed Sharfman and Fernando (2008), Dhaliwal et al. (2011) and Ng and Rezaee
(2015) by lagging the ESG factor and the control variables by one year. To further address
697
this endogeneity effect, we also examined whether including the lagged dependent variable
changed our main conclusions. Qualitatively similar results can be found, but by including
the lagged dependent variable, we lose all observations from 2018, leading to a lower power
of our statistical tests. Furthermore, we followed Xu et al. (2015) by running a two-stage
least squares (2SLS) model where, in a first step, we regressed the ESG factors on the lagged
ESG factor and the control variables. In a second step, we then regressed the cost of capital
on the ESG factor found in step 1, the lagged ESG factor and the control variables. Although
p-values are somewhat larger (most likely because of lower power as the number of
observations from 2018 was used to calculate the lagged ESG score), the same conclusions
can be drawn. As alternatives, we executed a panel generalized methods of moments
estimation using the same instruments (see also Naffa and Fain, 2022) and a pool mean
group (PMG) estimation (see Pesaran and Shin, 1999, where the lagged ESG score is
included as a regressor given that the PMG estimator is made for dynamic panel data
models). Qualitatively similar conclusions can be drawn.
Finally, as stated by Berg et al. (2022) and Svanberg et al. (2022), most data providers
report their ESG score without following a mandatory framework. As a consequence, the
methodologies of various data providers are somewhat different, as are the data sources
that they use. In turn, their provided ESG ratings diverge, and the methodologies are not
always completely transparent (see Llanos et al., 2023). In order not to depend on a single
data provider, we follow, e.g. Demers et al. (2021) and Albuquerque et al. (2020) and use
an alternative ESG score (i.e. the Bloomberg ESG rate) as a sensitivity check. We found
qualitatively similar results, although the Refinitiv scores seem to have a larger impact
on the cost of capital.
Furthermore, Refinitiv changed their methodology on 15 April 2020, in consultation
with market participants through discussions about sustainable investing and what is
required to encourage and accurately reflect the integration of ESG data into investment
strategies. The three key enhancements of the methodology were as follows: the
development of a materiality magnitude matrix where magnitude values are
automatically and dynamically adjusted as ESG corporate disclosure evolves and
matures; assigning a score of zero to companies who do not report on metrics relevant to
the industry; and taking into account company size where a market cap factor is
introduced to put more weight on small companies than large companies. There has been
criticism by Berg et al. (2020) that ESG ratings calculated before the methodological
change were retroactively modified, leading to potential errors when time series analyses
are performed. To examine whether our conclusions still hold, we have split the sample
into the periods 2018–2019 and 2020–2021, respectively. The first period contains ESG
data that was retroactively modified after the methodological change, while the second
time period contains end-of-year accounting data that only existed after the change. For
the period 2020–2021, investors were thus aware of the methodological change when
determining their expected return. Although p-values are somewhat larger because of a
smaller sample size, our conclusions remain robust for the two samples.
SAMPJ 5. Conclusions and discussion
15,3 This article is the first, to the best of the authors’ knowledge, to analyse the relationship
between the ESG score and the cost of capital of 600 large, mid and small capitalization
companies across 17 countries in the European region, which is a component of the EURO
STOXX 600 Index. The article further examines whether the effect is because of the
environmental, social and/or governance components and whether these specifically impact
698 the cost of equity, the cost of debt, the beta or the leverage ratio. As the European continent
is also diverse in terms of countries’ legal ecosystems (i.e. common vs civil law countries),
examining Europe offers the opportunity to be the first to examine whether the impact of a
firm’s ESG score on its cost of capital differs between countries with divergent institutional
settings. If a country indeed has a lower legal environment, it might be expected that
corporations domiciled in that country try to compensate this by improving their ESG rate
and disclosure to convince financiers to provide funds at a lower rate.
We find significant evidence that companies with a higher ESG score have a lower cost
of capital, but this relationship holds only for countries with a weaker legal environment,
thereby providing evidence for the substitution effect. The ESG score does not seem to have
a significant impact on the cost of equity, the cost of debt and the beta. Yet, in countries with
weaker legal institutions, the impact of the ESG score on the cost of debt is significantly
negative. In terms of the ESG component, especially environmental and social factors have a
significantly negative impact on the cost of capital, mainly in countries with a weaker legal
environment, suggesting once more that investments in ecological and social projects can
serve as a substitute for country-level governance. The environment and social scores also
have a significant negative impact on the cost of equity and the cost of debt in countries with
a weak legal environment, while firms with a high environmental and/or social score can
obtain more leverage in countries with weaker legal protection. In contrast, the governance
score seems to have a significant positive impact on the WACC, the cost of equity, the cost of
debt and leverage.
The results of this article are of particular relevance to companies as well as
policymakers focusing on how to stimulate firms to become more sustainable, as it
documents that investing in ESG projects does matter as it can lead to a lower cost of
capital, which positively impacts a firm’s valuations, and the possibility to invest even in
further projects having a positive net present value. The Sustainability Institute [12]
documented indeed in 2023 that companies are facing increasingly time-consuming ESG
projects and do not always immediately see the benefit. Some respondents to the survey by
the Sustainability Institute even indicated that it becomes difficult to justify the costs
associated with ESG ratings, analyses and data as it means a considerable increase in
human resources, consulting support and IT tools. The average expenditure for such
services ranged between $210,000 and $480,000 per year. Our results now clearly show that
investing in ESG can lead to a lower cost of capital and that there are also benefits involved.
The article also illustrates that firms domiciled in a weaker legal environment can use a
positive ESG score as a substitute. Firms being domiciled in a country with a weaker legal
environment might thus be able to attract funding at a cheaper rate in spite of their
institutional environment but because of the ESG investments. This does, of course, not
need to be an argument for policymakers to neglect the institutional environment of their
countries, as the strength of country institutions does also matter for a firm’s cost of capital
and the protection of shareholders and creditors in general. It is thus suggested for
policymakers to both improve country institutions as well as stimulate firms to invest in
ESG projects. This article also illustrates the necessity for regulators to screen for possible
greenwashing practices (see also Bernini and La Rosa, 2023). If firms know that a higher
ESG score leads to a lower cost of capital, they do not only have incentives to invest in ESG The impact of
projects but also to unethically claim that they are green. Whether firms have greenwashed in a firm’s ESG
our sample was not possible to examine, but future research could further examine whether
“real” high ESG scores matter compared to those scores that are the result of greenwashing.
score
Although this article examined the impact of the individual ESG components (i.e.
environmental, social and governance), future research could dig even deeper and examine
which particular environmental, social and governance topics do matter, especially because
we found evidence that the governance component seems to impact other cost-of-capital
699
components more than the environmental and social components. Also, future research
could investigate whether the level of greenness of the country in which the firm is
domiciled, rather than its legal environment, has a moderating effect. For this, the
Environmental Performance Index (EPI) could be used, as in Arat et al. (2023). In addition,
we found evidence that the additional costs of more stringent and comprehensive reporting
requirements on ESG are compensated by obtaining a lower cost of capital or the ability to
take on more debt, but future research should examine whether the compensation is only
partly or fully. That is, the ESG costs could lead to lower future free cash flows, while the
discount factor also decreases. The net effect is thus, until now, not yet known. In addition, a
caveat of our study is that we only have four years of data. Future research with more years
available could examine whether a higher ESG becomes “the new normal” in the future, not
leading to a lower cost of debt anymore. A further future research topic is to validate the
arguments of Sharfman and Fernando (2008) that firms having a higher ESG score also
attract other types of financiers, namely, those focusing on sustainable aspects. In this
study, we did not have access to data on the financiers and therefore left this as a future
research question.
Notes
1. See www.un.org/sustainabledevelopment/for the 17 SDGs.
2. Environmental issues include the reduction of energy, reduction of waste, natural resource
conservation and decent treatment of animals. Social issues are related to a company’s
relationships with stakeholders and answers questions such as whether a company donates to
the local community and whether workplace conditions take employees’ health and safety into
account. The governance component includes issues such as whether accounting methods are
accurate and transparent, conflicts of interests are avoided, and the company has a good
corporate governance.
3. Regulation (EU) 2019/2088 of the European Parliament and of the Council of 27 November 2019
on sustainability-related disclosures in the financial services sector.
4. Regulation (EU) 2020/852 of the European Parliament and of the Council of 18 June 2020 on the
establishment of a framework to facilitate sustainable investment, and amending Regulation
(EU) 2019/2088.
5. https://finance.ec.europa.eu/capital-markets-union-and-financial-markets/company-reporting-
and-auditing/company-reporting/corporate-sustainability-reporting_en
6. Directive 2014/95/EU of the European Parliament and of the Council of 22 October 2014
amending Directive 2013/34/EU as regards disclosure of non-financial and diversity information
by certain large undertakings and groups.
7. www.bloomberg.com/news/articles/2022-02-03/esg-by-the-numbers-sustainable-investing-
set-records-in-2021#::text¼ESG%20was%20born%20as%20an,exceeding%20%241.6%
20trillion%20in%202021.
SAMPJ 8. www.pwc.com/gx/en/services/audit-assurance/corporate-reporting/2021-esg-investor-survey.html
15,3
9. An ideal approach to completely handle the endogeneity effect is to identify an exogenous stock,
which would allow to use a difference-in-difference approach. Yet, this research examines in
detail whether the legal environment has a material impact that is more stable and does not
change frequently.
700 10. Not-reported analyses are available upon request.

11. There are no results reported with firm fixed effects. The reason is that we have 600 different
firms in our sample (which would lead to 599 dummy variables) while only having four years (i.e.
from 2018 to 2021) of data. Also, the level of variation of the main dependent variables (i.e. the
ESG scores and legal environment) is rather limited over time. (Hill et al. 2020) and Clark and
Linzer (2015) stress that fixed-effects coefficients are less reliable when the number of time
periods is limited, while Nickell (1981) explains that a set of panel data with a larger number of
individuals from firms and a rather small number of time periods could lead to biases of the
Hurwicz type. The problem is that fixed-effects coefficients are biased in a conservative fashion
when the data are characterized by a small number of panels, and this downward bias can be
reduced as the number of time periods increases.
12. See www.sustainability.com/thinking/rate-the-raters-2023/
References
Aboud, A. and Diab, A. (2019), “The financial and market consequences of environmental, social, and
governance ratings: the implications of recent political volatility in Egypt”, Sustainability
Accounting, Management and Policy Journal, Vol. 10 No. 3, pp. 498-520.
Adeneye, Y.B., Kammoun, I. and Ab Wahab, S. (2022), “Capital structure and speed of adjustment: the
impact of environmental, social and governance (ESG) performance”, Sustainability Accounting,
Management and Policy Journal, Vol. 14 No. 5, pp. 945-977.
Aggarwal, R., Erel, I., Stulz, R. and Williamson, R. (2009), “Differences in governance practices between
US and foreign firms: measurement, causes, and consequences”, Review of Financial Studies,
Vol. 22 No. 8, pp. 3131-3169.
Albuquerque, R., Koskinen, Y., Yang, S. and Zhang, C. (2020), “Resiliency of environmental and social
stocks: an analysis of the exogenous covid-19 market crash”, The Review of Corporate Finance
Studies, Vol. 9 No. 3, pp. 593-621.
Arat, E., Hachenberg, B., Kiesel, F.L. and Schiereck, D. (2023), “Greenium, credit rating, and the covid-
19 pandemic”, Journal of Asset Management, Vol. 24 No. 7, pp. 547-557.
Ashbaugh, H., Collins, D. and LaFond, R. (2004), Corporate Governance and the Cost of Equity Capital,
NYU Stern, New York, NY.
Atan, R., Alam, M., Said, J. and Zamri, M. (2018), “The impacts of environmental, social, and
governance factors on firm performance: panel study on malaysian companies”, Management of
Environmental Quality: An International Journal, Vol. 29 No. 2, pp. 182-194.
Bae, K., El Ghoul, S., Guedhami, O. and Zheng, X. (2020), “Board reforms and dividend policy:
international evidence”, Journal of Financial and Quantitative Analysis, Vol. 56 No. 4, pp. 1296-1320.
Bansal, P. (2005), “Evolving sustainably: a longitudinal study of corporate sustainable development”,
Strategic Management Journal, Vol. 26 No. 3, pp. 197-218.
Berg, F., Fabisik, K. and Sautner, Z. (2020), Is History Repeating Itself? The (un)Predictable past of ESG
Ratings, SSRN Working Paper.
Berg, F., Kölbel, J.F. and Rigobon, R. (2022), “Aggregate confusion: the divergence of ESG ratings”,
Review of Finance, Vol. 26 No. 6, pp. 1315-1344.
Bernini, F. and La Rosa, F. (2023), “Research in the greenwashing field: concepts, theories, and potential The impact of
impacts on economic and social value”, Journal of Management and Governance, pp. 1-40.
a firm’s ESG
Bhuiyan, M.B.U. and Nguyen, T.H.N. (2020), “Impact of CSDR on cost of debt and cost of equity capital:
Australian evidence”, Social Responsibility Journal, Vol. 16 No. 3, pp. 419-430.
score
Chen, Y., Li, T., Zeng, Q. and Zhu, B. (2023), “Effect of ESG performance on the cost of equity capital/
evidence from China”, International Review of Economics and Finance, Vol. 83, pp. 348-364.
Clark, T.S. and Linzer, D.A. (2015), “Should I use fixed or random effects?”, Political Science Research 701
and Methods, Vol. 3 No. 2, pp. 399-408.
de Zwaan, L., Brimble, M. and Stewart, J. (2015), “Member perceptions of ESG investing through
superannuation”, Sustainability Accounting, Management and Policy Journal, Vol. 6 No. 1, pp. 79-102.
Demers, E., Hendrikse, J., Joos, P. and Lev, B. (2021), “ESG did not immunize stocks during the covid-19
crisis, but investments in intangible assets did”, Journal of Business Finance and Accounting,
Vol. 48 Nos 3/4, pp. 433-462.
Dhaliwal, D., Zhen Li, O., Tsang, A. and Yang, Y. (2011), “Voluntary nonfinancial disclosure and the
cost of equity capital: the initiation of corporate social responsibility reporting”, The Accounting
Review, Vol. 86 No. 1, pp. 59-100.
DiMaggio, P.J. and Powell, W.W. (1983), “The iron cage revisited: institutional isomorphism and collective
rationality in organizational fields”, American Sociological Review, Vol. 48 No. 2, pp. 147-160.
Djankov, S., Glaeser, E., La Porta, R., Lopez-de-Silanez, F. and Shleifer, A. (2003), “The new comparative
economics”, Journal of Comparative Economics, Vol. 31 No. 4, pp. 595-619.
Djankov, S., La Porta, R., Lopez-de-Silans, F. and Shleifer, A. (2002), “The regulation of entry”, The
Quarterly Journal of Economics, Vol. 118 No. 2, pp. 453-517.
Durnev, A. and Kim, E.H. (2005), “To steal or not to steal: firm attributes, legal environment, and
valuation”, The Journal of Finance, Vol. 60 No. 3, pp. 1461-1493.
Dyck, A., Lins, K.V., Roth, L. and Wagner, H.F. (2019), “Do institutional investors drive corporate social
responsibility? International evidence”, Journal of Financial Economics, Vol. 131 No. 3, pp. 693-714.
Eccles, R. and Klimenko, S. (2019), “The investor revolution”, Harvard Business Review, pp. 106-116.
El Ghoul, S.E., Guedhami, O., Kwok, C.C.Y. and Mishra, D.R. (2011), “Does corporate social responsibility
affect the cost of capital?”, Journal of Banking and Finance, Vol. 35 No. 9, pp. 2388-2406.
Fama, E. and French, K. (1992), “The cross-section of expected stock returns”, The Journal of Finance,
Vol. 47 No. 2, pp. 427-465.
Ge, W., Kim, J. and Song, B.Y. (2012), “Internal governance, legal institutions, and bank loan
contracting around the world”, Journal of Corporate Finance, Vol. 18 No. 3, pp. 413-432.
Gonçales, T.C., Dias, J. and Barras, V. (2022), “Sustainability performance and the cost of capital”,
International Journal of Financial Studies, Vol. 10 No. 3, pp. 63-95.
Goss, A. and Roberts, G.S. (2011), “The impact of corporate social responsibility and the cost of bank
loans”, Journal of Banking and Finance, Vol. 35 No. 7, pp. 1794-1810.
Hill, T.D., Davis, A.P., Roos, J.M. and French, M.T. (2020), “Limitations of fixed-effects models for panel
data”, Sociological Perspectives, Vol. 63 No. 3, pp. 357-369.
Hong, A. and Kacperczyk, M. (2009), “The price of sin: the effects of social norms on markets”, Journal
of Financial Economics, Vol. 93 No. 1, pp. 15-36.
Huo, X., Lin, H., Meng, Y. and Woodq, P. (2021), “Institutional investors and cost of capital: the
moderating effect of ownership structure”, Plos One, Vol. 16 No. 4, pp. 1-40.
John, K., Litov, L. and Yeung, B. (2008), “Corporate governance and risk-taking”, Journal of Finance,
Vol. 63 No. 4, pp. 1689-1728.
Johnson, R. (2020), “The link between environmental, social, and corporate governance disclosure and the
cost of capital in South Africa”, Journal of Economic and Financial Sciences, Vol. 13 No. 1, pp. 543-555.
SAMPJ Khanchel, I. and Lassoued, N. (2022), “ESG disclosure and the cost of capital. Is there a ratcheting effect
over time?”, Sustainability, Vol. 14 No. 15, pp. 1-19.
15,3
King, A.A. and Shaver, J.M. (2001), “Are aliens green? Assessing foreign establishments’ environmental
conduct in the United States”, Strategic Management Journal, Vol. 22 No. 11, pp. 1069-1085.
Klapper, L.F. and Love, I. (2004), “Corporate governance, investor protection, and performance in
emerging markets”, Journal of Corporate Finance, Vol. 10 No. 5, pp. 703-728.
702 La Porta, R. and Lopez-de-Silanes, F. (1998), “Law and finance”, Journal of Political Economy, Vol. 106
No. 6, pp. 1113-1155.
La Porta, R., Lopez-de-Silanes, F. and Shleifer, A. (2008), “The economic consequences of legal origins”,
Journal of Economic Literature, Vol. 46 No. 2, pp. 285-332.
Liu, D., Gu, K. and Hu, W. (2023), “ESG performance and stock idiosyncratic volatility”, Finance
Research Letters, Vol. 58.
Llanos, A., Vijaya, A. and Wicaksono, H. (2023), Rating ESG key performance indicators in the airline
industry, Environment, Development and Sustainability, Forthcoming.
Mackey, A., Mackey, T. and Barney, J. (2007), “Corporate social responsibility and firm performance:
investor preferences and corporate strategies”, Academy of Management Review, Vol. 32 No. 3,
pp. 817-835.
Mahmut, A., Güzhan, G. and Korkmaz, E. (2022), “Impact of ESG performance on firm value and
profitability”, Borsa Instanbul Review, Vol. 22 No. 2, pp. 119-127.
Mizruchi, M.S. and Fein, L.C. (1999), “The social construction of organizational knowledge: a study of
the uses of coercive, mimetic, and normal isomorphism”, Administrative Science Quarterly,
Vol. 44 No. 4, pp. 653-683.
Mohammad, W.M.W., Osman, M. and Rani, M.S.A. (2023), “Corporate governance and environmental,
social, and governance (ESG) disclosure and its effect on the cost of capital in emerging
markets”, Asian Journal of Business Ethics, Vol. 12 No. 2, pp. 175-191.
Mulligan, C.B. and Shleifer, A. (2005), “The extent of the market and the supply of regulation”, The
Quarterly Journal of Economics, Vol. 120 No. 4, pp. 1445-1473.
Myers, S.C. and Majluf, N.S. (1984), “Corporate financing and investment decisions when firms have
information that investors do not have”, Journal of Financial Economics, Vol. 13 No. 2,
pp. 187-221.
Naffa, H. and Fain, M. (2022), “A factor approach to the performance of ESG leaders and laggards”,
Financial Research Letters, Vol. 44, pp. 1-8.
Ng, A. and Rezaee, Z. (2015), “Business sustainability performance and cost of equity capital”, Journal
of Corporate Finance, Vol. 34, pp. 128-149.
Nickell, S. (1981), “Biases in dynamic models with fixed effects”, Econometrica, Vol. 49 No. 6, pp. 1417-1426.
Oikonomou, I., Brooks, C. and Pavelin, S. (2012), “The effects of corporate social performance on
financial risk and utility: a longitudinal study”, Financial Management, Vol. 41 No. 2, pp. 483-515.
Ozer, G. and Cam, I. (2022), “The influence of country governance on the capital structure and
investment financing decisions of firms: an international investigation”, Borsa Istanbul Review,
Vol. 22 No. 2, pp. 257-271.
Pesaran, M.H. and Shin, Y. (1999), An Autoregressive Distributed Lag Modelling Approach to Cointegration
Analysis, in Strom S., Holly, A., and Diamond, P. (Eds), Cambridge University Press.
Petersen, H. and Vredenburg, H. (2009), “Morals or economics? Institutional investor preferences for
corporate social responsibility”, Journal of Business Ethics, Vol. 90 No. 1, pp. 1-14.
Pham, H., Sutton, B., Brown, P. and Brown, D. (2020), “Moving towards sustainability: a theoretical design of
environmental performance measurement systems”, Journal of Cleaner Production, Vol. 269, pp. 1-40.
Qi, Y., Roth, L. and Wald, J.K. (2010), “Political rights and the cost of debt”, Journal of Financial
Economics, Vol. 95 No. 2, pp. 202-226.
Ramirez, A., Monslave, J., Gonzalez-Ruiz, J., Almonacid, P. and Peña, A. (2022), “Relationship between The impact of
the cost of capital and environmental, social, and governance scores: evidence from Latin
America”, Sustainability, Vol. 14 No. 9, pp. 1-40. a firm’s ESG
Richardson, A. and Welker, M. (2001), “Social disclosure, financial disclosure, and the cost of equity score
capital”, Accounting, Organizations and Society, Vol. 26 Nos 7/8, pp. 597-616.
Sharfman, M. and Fernando, C. (2008), “Environmental risk management and the cost of capital”,
Strategic Management Journal, Vol. 29 No. 6, pp. 569-592.
Shevelena, G.I. (2022), “Corporate governance in generating companies of the russian electric power
703
industry in the context of ESG agenda”, Global Energy Interconnection, Vol. 5 No. 5, pp. 512-523.
Suto, M. and Takehara, H. (2017), “CSR and cost of capital: evidence from Japan”, Social Responsibility
Journal, Vol. 13 No. 4, pp. 798-816.
Svanberg, J., Ardeshiri, T., Samsten, I., Öhman, P., Neidermeyer, P.E., Rana, T., Maisano, F. and
Danielson, M. (2022), “Must social performance ratings be idiosyncratic? An exploration of social
performance ratings with predictive validity”, Sustainability Accounting, Management and
Policy Journal, Vol. 14 No. 7, pp. 313-348.
Xu, S., Liu, D. and Huang, J. (2015), “Corporate social responsbility, the cost of equity capital and
ownership structure: an analysis of Chinese firms”, Australian Journal of Management, Vol. 40
No. 2, pp. 245-276.
Yilmaz, I. (2022), “ESG-based sustainability performance and its impact on cost of capital: International
evidence from the energy sector”, International Journal of Applied Economics, Finance and
Accounting, Vol. 12 No. 2, pp. 21-30.
Zhu, F. (2014), “Corporate governance and the cost of capital: an international study”, International
Review of Finance, Vol. 14 No. 3, pp. 393-429.
Further reading
Chen, L. and Zhao, X. (2006), “On the relation between the market-to-book ratio, growth opportunity,
and leverage ratio”, Finance Research Letters, Vol. 3 No. 4, pp. 253-266.
Du, X., Weng, J., Zeng, Q., Chang, Y. and Pei, H. (2017), “Do lenders applaud corporate environmental
performance? Evidence from Chinese private-owned firms”, Journal of Business Ethics, Vol. 143
No. 1, pp. 179-207.
Ellili, N.O.D. (2020), “Environmental, social, and governance disclosure, ownership structure and cost of
capital: evidence from the UAE”, Sustainability, Vol. 12 No. 18, pp. 7706-7734.
Liu, H. and Ruan, L. (2021), “Environmental, social, governance activities and firm performance:
evidence from China”, Sustainability, Vol. 13 No. 2, pp. 767-780.
Meyers, J. and Rowan, B. (1997), “Institutionalized organizations: formal structure as myth and
ceremony”, American Journal of Sociology, Vol. 83 No. 2, pp. 340-363.
Surroca, J., Tribo, J. and Waddock, S. (2010), “Corporate responsibility and financial performance: the
role of intangible resources”, Strategic Management Journal, Vol. 31 No. 5, pp. 463-490.
Corresponding author
Randy Priem can be contacted at: randy.priem@ubi.edu
For instructions on how to order reprints of this article, please visit our website:
www.emeraldgrouppublishing.com/licensing/reprints.htm
Or contact us for further details: permissions@emeraldinsight.com

Cost of Capital and ESG

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Cost of Capital and ESG

Uploaded by

Copyright:

Available Formats

The current issue and full text archive of this journal is available on Emerald Insight at:

3. Sample, variables and model

WACC ¼ b0 þ b1 ESG þ b2 LEGALENV þ b3 SIZE þ b4 FREE FLOAT

WACC ¼ b0 þ b1 ESG þ b2 LEGAL þ b3 ESG * LEGAL þ b4 SIZE þ b5 FREE FLOAT

the impact of ESG

Intercept 0.4426* (<0.0001) 0.4977* (<0.0001) 1.9829 (0.7240) 1.9116 (0.7750)

Model (7) Model (8) Model (9) Model (10)

Intercept 0.4542* (<0.0001) 0.4686* (<0.0001) 5.1765 (0.3440) 4.6467 (0.4532)

Model (7) Model (8) Model (9) Model (10)

Intercept 0.4513* (<0.0001) 0.4697* (<0.0001) 5.1521 (0.3485) 5.1813 (0.4118)

Model (7) Model (8) Model (9) Model (10)

Intercept 0.4643* (<0.0001) 0.5567* (<0.0001) 1.3637 (0.8000) 5.8050 (0.3505)

700 10. Not-reported analyses are available upon request.

You might also like