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ESG scores and cost of debt

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  • Apergis, Nicholas
  • Poufinas, Thomas
  • Antonopoulos, Alexandros

Abstract

As sustainable investing becomes central to capital allocation in many markets, the Environmental, Social and Governance (ESG) metrics and scores have become of critical importance. This study aims to analyze the relation between the cost of debt and ESG scores. We provide evidence that the cost of debt for borrowing firms is associated with their ESG score/rating. Firms that have low ESG scores are considered to be riskier, in the sense that they are exposed to liabilities related to Environmental, Social and Corporate factors that ultimately increase their probability of default. In case of a bankruptcy unsecured bondholders' claims may be subordinate to those liabilities. Using a framework for evaluating ESG performance developed by Refinitiv, this study investigates whether firms within S&P 500 over the period 2010–2019 that exhibit strong ESG scores benefit from lower bond spreads and better bond ratings relative to firms with weaker ESG scores. After controlling for other risk characteristics our analysis points that better ESG rating is associated with lower cost of unsecured debt in the primary bond market. Our findings are consistent over the aggregate metric and all E,S, and G pillars. Furthermore, they support the ongoing calls for improved transparency, which would allow for the reporting of quantifiable ESG information in firms' disclosures.

Suggested Citation

  • Apergis, Nicholas & Poufinas, Thomas & Antonopoulos, Alexandros, 2022. "ESG scores and cost of debt," Energy Economics, Elsevier, vol. 112(C).
    • Handle: RePEc:eee:eneeco:v:112:y:2022:i:c:s0140988322003383
    DOI: 10.1016/j.eneco.2022.106186
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    Cited by:

    1. Deng, Xiang & Li, Weihao & Ren, Xiaohang, 2023. "More sustainable, more productive: Evidence from ESG ratings and total factor productivity among listed Chinese firms," Finance Research Letters, Elsevier, vol. 51(C).
    2. Pramendra Singh Tank & Sanjay Kumar Jain & Balagopal Gopalakrishnan, 2023. "Do firms respond to commitments on climate change? Impact of COP21 on investment intensity," IIMA Working Papers WP 2023-08-02, Indian Institute of Management Ahmedabad, Research and Publication Department.
    3. Zongrun Wang & Lili Yang & Xiaohang Ren & Duong Phuong Thao Pham, 2023. "Facilitate or Inhibit: Corporate Environmental Performance and Financing Costs," Evaluation Review, , vol. 47(4), pages 727-759, August.
    4. Qian, Kun & Shi, Bingjie & Song, Yunling & Wu, Hao, 2023. "ESG performance and loan contracting in an emerging market," Pacific-Basin Finance Journal, Elsevier, vol. 78(C).
    5. Lai, Xiaobing & Zhang, Fan, 2022. "Can ESG certification help company get out of over-indebtedness? Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 76(C).
    6. Jorge Antunes & Peter Wanke & Thiago Fonseca & Yong Tan, 2023. "Do ESG Risk Scores Influence Financial Distress? Evidence from a Dynamic NDEA Approach," Sustainability, MDPI, vol. 15(9), pages 1-32, May.
    7. Ren, Xiaohang & Zeng, Gudian & Zhao, Yang, 2023. "Digital finance and corporate ESG performance: Empirical evidence from listed companies in China," Pacific-Basin Finance Journal, Elsevier, vol. 79(C).
    8. Shahzad, Umer & Ghaemi Asl, Mahdi & Tedeschi, Marco, 2023. "Is there any market state-dependent contribution from Blockchain-enabled solutions to ESG investments? Evidence from conventional and Islamic ESG stocks," International Review of Economics & Finance, Elsevier, vol. 86(C), pages 139-154.
    9. Vilija Aleknevièiene & Sandra Stralkute, 2023. "Impact of corporate social responsibility on cost of debt in Scandinavian public companies," Oeconomia Copernicana, Institute of Economic Research, vol. 14(2), pages 585-608, June.
    10. Wilert Puriwat & Suchart Tripopsakul, 2022. "From ESG to DESG: The Impact of DESG (Digital Environmental, Social, and Governance) on Customer Attitudes and Brand Equity," Sustainability, MDPI, vol. 14(17), pages 1-15, August.
    11. Sarfraz Hussain & Rosalan Ali & Walid Emam & Yusra Tashkandy & Pradeep Mishra & Mochammad Fahlevi & Adelajda Matuka, 2023. "Economic Policy Uncertainty and Firm Value: Impact of Investment Sentiments in Energy and Petroleum," Sustainability, MDPI, vol. 15(12), pages 1-28, June.
    12. Thamir Al Barrak & Kaouther Chebbi & Abdullah A. Aljughaiman & Mohammed Albarrak, 2023. "Exploring the Interplay between Sustainability and Debt Costs in an Emerging Market: Does Financial Distress Matter?," Sustainability, MDPI, vol. 15(12), pages 1-19, June.
    13. Magdalena Zioło & Iwona Bąk & Anna Spoz, 2023. "Theoretical framework of sustainable value creation by companies. What do we know so far?," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 30(5), pages 2344-2361, September.

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    More about this item

    Keywords

    ESG scores/ratings; Environmental; Social; Governance; Cost of debt;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth

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