Impact of ESG Score on Cost of Capital - Evidence from the Swedish Market

Abstract

This paper aims to examine if there is a significant relationship between Swedish firms ESG scores and their financing costs. By constructing three regression models with WACC, cost of equity and cost of debt as the dependent variables and ESG score as an independent variable, this paper tests three different hypotheses. Using a sample of 468 observations from 157 companies between the years 2015 to 2020, we find a significant negative relationship between ESG scores and both WACC and cost of debt. However, we do not find any significant results for the model with cost of equity. Our results show that Swedish firms are rewarded with lower WACC and cost of debt for their work with sustainability. These results have important practical implications for asset managers, corporations and policymakers. Firstly, asset managers gain valuable information of how a more sustainable firm receives a higher valuation. Secondly, corporations have a rationale to pursue investments in ESG activities as it lowers the cost of debt. Thirdly, the results support how policy makers can strengthen the direction to a sustainable future with effective incentives for stakeholders.