The Effect of Environmental, Social, and Governance Performance Factors on Firms’ Cost of Debt: International Evidence

Abstract

This study examines the effect of environmental, social, and governance (ESG) performance on firms’ cost of debt (COD). Based on a sample of 18,950 firm-year observations from 41 countries over the period of 2008–2015, we find a significant negative association between aggregate ESG performance and firms’ COD. We also observe a significant negative association between the individual ESG performance factors (E, S, and G) and firms’ COD. In addition, the negative association between aggregate/individual ESG performance and firms’ COD is economically significant, ranging from 16.93% to 21.20% of median COD values. Finally, disclosure of ESG performance, stakeholder orientation, investor protection, control of corruption, and social progress have pronounced effects on the negative association between ESG performance and firms’ COD. Taken together, our results suggest that ESG performance has a significant negative effect on firms’ COD from an international perspective.