ESG Rating and Cost of Capital

Abstract

The idea of ESG intrigues many Chineses firms nowadays, people start to initiate the concept of sustainable development. This essay utilizes Shanghai and Shenzhen A-share listed enterprises from 2009 to 2020 as research ex-amples, integrating and comparing the given data from the CSMAR database and Huazheng ESG ratings. This study will investigate the impact of ESG on cost of capital and the hidden connection between them that can enrich the pervious study and provide more testified analysis. As a result, the re-search has found that ESG could greatly reduce the cost of capital. ESG rat-ings increase the companys information disclosure and companies are forced to build standard group structure, as a result, it lowers the companys infor-mation risk and default risk, which gives the reduction of cost of capital. Be-sides from information risk and default risk, higher ESG ratings can also gain companys reputation and win the trust of the stakeholders. By reveal-ing this relation between ESG and the cost of capital, it enriches the litera-ture on the consequences of ESG. Furthermore, it demonstrates the im-portance of ESG in companys practical operation, which is no longer an ab-stract concept that can be ignored. Thus, this research will help build and improve the ESG development ecosystem in China and promote high-quality development.