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Impact of the Environmental, Social, and Governance Rating on the Cost of Capital: Evidence from the S&P 500

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  • Dietmar Ernst

    (International School of Finance (ISF), Nuertingen-Geislingen University, Sigmaringer Straße 25, 72622 Nuertingen, Germany)

  • Florian Woithe

    (International School of Finance (ISF), Nuertingen-Geislingen University, Sigmaringer Straße 25, 72622 Nuertingen, Germany)

Abstract

We use the S&P 500 to investigate whether companies with a good ESG score benefit from a lower cost of capital. Using Bloomberg’s financial data and MSCI’s ESG score for 498 companies, we calculated the measures of descriptive statistics, finding that companies with better ESG ratings enjoy both a lower cost of equity and a lower cost of debt. However, their WACC shows no improvement with a higher ESG score. Companies with a poor ESG rating have a lower WACC due to the higher proportion of debt capital, coupled with a higher cost of debt, compared to the cost of equity capital. Calculating the Pearson correlation coefficient, we found a slightly negative linear relationship between the ESG score and the beta factor, and between the ESG score and the cost of debt. No linear relationship was found between the WACC and the ESG score. Finally, linear regression analysis shows a negative and significant effect of the ESG score on the root beta factor. This research indicates that companies with better ESG scores benefit from lower cost of equity and debt. Our results may encourage companies to operate more sustainably to reduce their cost of capital.

Suggested Citation

  • Dietmar Ernst & Florian Woithe, 2024. "Impact of the Environmental, Social, and Governance Rating on the Cost of Capital: Evidence from the S&P 500," JRFM, MDPI, vol. 17(3), pages 1-15, February.
    • Handle: RePEc:gam:jjrfmx:v:17:y:2024:i:3:p:91-:d:1342225
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    References listed on IDEAS

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    2. Gigante, Gimede & Manglaviti, Davide, 2022. "The ESG effect on the cost of debt financing: A sharp RD analysis," International Review of Financial Analysis, Elsevier, vol. 84(C).
    3. Nicola Raimo & Alessandra Caragnano & Marianna Zito & Filippo Vitolla & Massimo Mariani, 2021. "Extending the benefits of ESG disclosure: The effect on the cost of debt financing," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 28(4), pages 1412-1421, July.
    4. Wong, Woei Chyuan & Batten, Jonathan A. & Ahmad, Abd Halim & Mohamed-Arshad, Shamsul Bahrain & Nordin, Sabariah & Adzis, Azira Abdul, 2021. "Does ESG certification add firm value?," Finance Research Letters, Elsevier, vol. 39(C).
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    Cited by:

    1. Olakunle Oloruntobi & Adel Gohari & Safizahanin Mokhtar & Kasypi Mokhtar & Siti Marsila Mhd. Ruslan, 2025. "Comparative analysis of long-term returns, financial considerations, and measurement challenges in future ESG investing," Journal of Asset Management, Palgrave Macmillan, vol. 26(3), pages 271-297, May.
    2. Tawfiq Taleb Tawfiq & Hala Tawaha & Asem Tahtamouni & Nashat Ali Almasria, 2024. "The Influence of Environmental, Social, and Governance Disclosure on Capital Structure: An Investigation of Leverage and WACC," JRFM, MDPI, vol. 17(12), pages 1-16, December.
    3. Ahmed Saber Moussa & Mahmoud Elmarzouky, 2024. "Beyond Compliance: How ESG Reporting Influences the Cost of Capital in UK Firms," JRFM, MDPI, vol. 17(8), pages 1-21, July.

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