The impact of ESG on the cost of debt in nonfinancial firms: Evidence from European countries

Abstract

This study examines the relationship between ESG performance and the cost of debt among publicly listed non-financial firms in Europe over the period 2018–2024. Using a panel dataset of 1,097 firm-year observations from 195 European non-financial firms, the study estimates pooled regression models with year, industry, and country fixed effects and robust standard errors clustered at the firm level. ESG performance is measured at both the aggregate level and across the three individual pillars — Environmental, Social, and Governance — using scores obtained from the WRDS database. Financial data are sourced from Capital IQ. The empirical results indicate that none of the estimated ESG coefficients reach statistical significance at conventional levels across any of the model specifications examined. The estimated effects are also economically negligible in magnitude. These findings are consistent with the null result documented by Gigante and Manglaviti (2022) for European non-financial firms using a more rigorous identification strategy, and with Cantino et al. (2017), who conclude from a review of thirty-one studies that the evidence for ESG affecting the cost of debt remains decidedly mixed. Several possible explanations may account for this pattern — including limitations in ESG information quality and comparability during the sample period, a potential narrowing of ESG performance differentiation as mandatory disclosure expanded under European regulatory frameworks, and the dominance of macroeconomic conditions during an unusually volatile period. The robustness analyses confirm that the null result remains stable across alternative sample specifications, estimation approaches, geographic subsamples, and cost of debt measures