The impact of ESG score on firm's cost of capital and riskiness

Abstract

This paper investigates the relationship between a firm´s Thomson Reuters ESG score and its weighted average cost of capital & implied credit default swap spread. The research is conducted on the Swedish stock exchanges and uses all available firms with an available ESG score. The effect is measured from 2017 to 2019. The paper uses a random effects regression in combination with a pooled OLS regression to determine the relationships. There is no evidence that ESG score affect a firm´s weighted average cost of capital. There is evidence at 5% significance that ESG have a positive effect on a firm´s implied CDS spread with a coefficient of .2081717 or .2368187, depending on the modelling. The findings stand in contrast to some previous literature which finds that ESG has a significant effect on a firm´s cost of capital.