Beyond the Green Premium: Assessing the Cost-Benefit Threshold of ESG Scores in Europe

Abstract

This study examines the relationship between ESG scores and the cost of equity for European firms, focusing on identifying a potential ESG score threshold. The results of our study confirm our first hypothesis that ESG score has a significant impact on the cost of equity. The results also validate the existence of an ESG score threshold, where benefits in terms of reduced cost of equity diminish beyond a certain point. The threshold, found within the mean range of ESG scores in our sample, suggests that investors may not fully integrate ESG considerations into their investment decisions. This may indicate a misalignment that challenges the effectiveness of the current integration of non-financial metrics into financial decision making by investors. Our study contributes to the ongoing discourse on sustainable finance by challenging the prevailing assumption that the relationship between ESG scores and cost of equity is linear.