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Does Sustainability Lower Financing Costs? Evidence from a Dynamic System GMM Analysis

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  • Burcu ZENGÄ°N

Abstract

This study provides a comprehensive examination of the non-linear relationship between environmental, social, and governance (ESG) performance and firms’ cost of debt. Using a balanced panel dataset of 461 U.S. non-financial firms for the period 2019–2023, the analysis employs the dynamic System-GMM estimator to address potential endogeneity, lagged dependence, and unobserved firm-level heterogeneity. The empirical findings reveal a clear U-shaped relationship between ESG performance and the cost of debt. Moderate ESG engagement enhances creditworthiness and reduces borrowing costs, whereas excessive or unbalanced ESG commitments can increase firms’ financing burdens. Robustness analyses confirm the presence of similar non-linear effects across the environmental, social, and governance dimensions, with environmental performance emerging as the strongest driver of the observed pattern. The social and governance pillars also exert significant, albeit relatively weaker, influences on borrowing costs. Overall, the results demonstrate that ESG functions as a dual-purpose strategic resource with the potential to either create value or impose financial pressures depending on its intensity. By highlighting the importance of maintaining a balanced and optimal level of ESG engagement to improve financing conditions, this study offers a meaningful contribution to the corporate finance and sustainability literature.

Suggested Citation

  • Burcu ZENGÄ°N, 2026. "Does Sustainability Lower Financing Costs? Evidence from a Dynamic System GMM Analysis," Fiscaoeconomia, Tubitak Ulakbim JournalPark (Dergipark), issue 1.
    • Handle: RePEc:fis:journl:260125
    DOI: 10.25295/fsecon.1762645
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth
    • Q50 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - General

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