Research: The Influence of ESG Scores on Corporate Cost of Capital and Cross-Sectional ...

Research question: How do firm-level ESG scores affect the cost of capital and subsequent stock returns across major public equity markets?

Environmental, Social, and Governance (ESG) factors have become increasingly significant in investment decision-making, with asset managers and institutional investors integrating ESG scores into their portfolio construction and risk assessment frameworks. The potential for ESG performance to influence a firm's financial outcomes, particularly its cost of capital and stock performance, has attracted substantial academic and industry attention.

However, the empirical evidence on whether and how ESG scores affect the cost of equity and debt, as well as realized stock returns, remains mixed. Prior research has produced conflicting results, often due to differences in methodology, time horizons, regional coverage, and measurement of ESG factors. This project seeks to clarify these relationships by employing recent datasets and robust econometric methods.

The study will leverage cross-country panel data from established ESG rating providers, combine it with firm-level financial variables, and apply asset pricing models to identify the channels through which ESG performance impacts the cost of capital and risk-adjusted returns. The analysis will focus on whether higher ESG-rated firms consistently achieve lower financing costs and how these firms' stocks perform relative to peers, controlling for size, industry, and risk factors.

This research is relevant to both academics and practitioners, offering insights for financial analysts, policy-makers, and investors seeking to understand the real financial implications of ESG integration in capital markets.