ESG and the Cost of Debt: Evidence from the Nordic countries

Abstract

This study investigates whether environmental, social and governance (ESG) performance has an effect on the cost of debt for firms incorporated in the Nordic countries. In order to answer this research question, data was collected for the time period 2015-2020 from a sample of 560 active public Nordic firms. The relationship between ESG performance and the cost of debt is analyzed through Stakeholder theory, risk mitigation view and the overinvestment view. Stakeholder theory and the risk mitigation view predicts a negative relationship, while the overinvestment view suggests a positive relationship. Supporting Stakeholder theory and risk mitigation view, the empirical result of this study finds a negative relationship between ESG performance and the cost of debt. These results are persistent over several performed sensitivity and robustness tests. The implication of these findings is that creditors seem to value ESG performance by rewarding companies in terms of lower cost of debt. These results also suggests that firms may be able to reduce their debt financing costs by improving their ESG performance.