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Sustainability Performance and the Cost of Capital

Author

Listed:
  • Tiago Cruz Gonçalves

    (ISEG—Lisbon School of Economics and Management, Universidade de Lisboa, Advance/CSG, 1200-781 Lisboa, Portugal)

  • João Dias

    (ISEG—Lisbon School of Economics and Management, Universidade de Lisboa, 1200-781 Lisboa, Portugal)

  • Victor Barros

    (ISEG—Lisbon School of Economics and Management, Universidade de Lisboa, Advance/CSG, 1200-781 Lisboa, Portugal)

Abstract

This study examines the association between firms’ environmental, social, and governance (ESG) performance and the cost of capital for the largest European firms listed on the STOXX Euro 600 in a large panel from 2002 to 2018. We find that ESG is priced by both debt and equity markets, although in different directions. While better ESG performance is associated with a lower cost of equity, the relationship is positive regarding the cost of debt. We also account for industry idiosyncrasies. The relationship with the cost of equity is penalized for firms lagging in ESG performance compared with industry peers, and the industry median corporate sustainability performance score is around optimal to balance the cost of equity and cost of debt. We also find that ESG is not influential in shaping firms’ cost of capital in periods of financial and sovereign crises. Overall, in the same research setting, we find that the channels of firms’ cost of capital composition behave differently in response to changes in sustainability performance.

Suggested Citation

  • Tiago Cruz Gonçalves & João Dias & Victor Barros, 2022. "Sustainability Performance and the Cost of Capital," IJFS, MDPI, vol. 10(3), pages 1-32, August.
    • Handle: RePEc:gam:jijfss:v:10:y:2022:i:3:p:63-:d:881664
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    References listed on IDEAS

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    Cited by:

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    2. Jyotirani Gupta & Niladri Das, 2024. "Navigating the trade‐off between corporate social responsibility disclosure and the cost of financing: Evidence from BRICS economies," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 45(4), pages 1927-1943, June.
    3. Fransisca Fransisca & Arie Pratama & Kamaruzzaman Muhammad, 2025. "Does Sustainability Pay Off? Examining Governance, Performance, and Debt Costs in Southeast Asian Companies (A Survey of Public Companies in Indonesia, Malaysia, Singapore, and Thailand for the 2021–2," JRFM, MDPI, vol. 18(7), pages 1-25, July.
    4. Gonçalves, Tiago Cruz & Gaio, Cristina, 2023. "Corporate sustainability disclosure and media visibility: Mixed method evidence from the tourism sector," Journal of Business Research, Elsevier, vol. 155(PB).
    5. Amal Fadhil Akho Bashah Al Kaab & Asaad Mohammed Ali Wahhab, 2023. "Evidence from Iraqi Banks on the Reporting of Sustainability Determinants and Their Impact on Market Returns," Technium Social Sciences Journal, Technium Science, vol. 44(1), pages 79-102, June.

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