ESG, readability and the cost of financing

Abstract

In recent years, research on business sustainability and the readability of financial reporting has surged. This study examines the relationship between the cost of financing and both ESG performance and financial reporting readability, using a panel of U.S. firms. Additionally, we investigate whether there is an interplay between Environmental, social and governance (ESG) performance and the readability of annual report narratives, and if these factors have complementary or substitutive effects on the cost of financing. Interestingly, our findings reveal a positive correlation between ESG performance and the cost of financing, which contradicts much of the existing literature. Furthermore, we observe that increased reporting readability reduces the cost of financing, aligning with previous studies. However, we do not find any interplay or associated interaction between ESG performance and readability in relation to the cost of financing.