The payoff of doing good : The impact of ESG criteria on firms' cost of debt capital : European evidence

Abstract

During the past two decades a growing attention towards the phenomenon of corporate social responsibility (CSR) has emerged and firms are increasingly expected to implement CSR practices by socially conscious stakeholders. The purpose of this thesis is to study the relationship between CSR performance and cost of debt of a firm in order to find out how non-financial performance and CSR practices are considered by creditors when assessing the creditworthiness of a firm.

In this thesis CSR performance is measured with environmental, social and governance (ESG) scores. The impact of ESG scores on the firms’ cost of debt is examined using pooled OLS regressions. The data includes information on 346 publicly listed firms from 7 European markets and it is obtained from Thomson Reuters ASSET4 database for the time period from 2002 to 2018. Furthermore, the thesis aims to find out whether the firms with the highest ESG scores gain financial benefit in the form of a lower cost of debt contrasted with the firms with the lowest ESG scores.

This study contributes to the existing literature by finding empirical evidence supporting the theory that firms with superior CSR performance tend to benefit from lower interest rates in the European market. The findings suggest that firms with superior overall ESG scores are rewarded by creditors with lower interest rates. Furthermore, the results propose that firms wanting to decrease their cost of debt should invest especially in CSR activities that improve the social score of the firm as superior social performance can lead to equally lower cost of debt as having a high overall ESG score. In addition, high governance scores, and contradictorily also low social scores, are found to be negatively related to cost of debt but the impact is smaller compared to the high overall ESG scores and the high social scores.