The Impact of Financial and Sustainability Performance on the Cost of Capital

This research seeks to find out how a company’s financial success and commitment to sustainability influence the amount they pay for capital. This amount is what businesses owe to their investors and lenders for the funds they receive. The returns that are anticipated depend on how these parties view the company’s performance and risk level. Ideally, they look for strong performance and minimal risks. The research included a sample of 56 manufacturing firms, with a total of 222 instances recorded. Information was collected using documentation methods and analyzed with STATA software. The findings from the Chow and Hausman tests indicate that the Fixed Effects Model (FEM) is the most appropriate method. The study shows that the sustainability performance, which involves applying environmental, social, and governance standards, along with return on equity (ROE), does not have a major influence. Conversely, the debt-to-equity ratio, the size of the company, and cash flow from operations do significantly impact capital costs. This study indicates that investors and lenders prioritize a company’s ability to manage cash for covering expenses and repaying debts rather than focusing on sustainability measures when making funding decisions. These findings emphasize the need for the government to strengthen its regulatory policies, introduce measures for sustainability performance, and set clear rewards and penalties to raise awareness among businesses, lenders, and investors.