Corporate Sustainability, Cost of Equity, and Credit Ratings

Using an up-to-date international sample of firms, we study whether corporate sustainability (proxied by ESG ratings), influences a company’s cost of equity and whether Credit Rating Agencies (CRAs) incorporate such an impact in their credit risk assessments. We show that higher ESG performance reduces the cost of equity due to a reduction in ESG risk. This also holds after decomposing the ESG rating into its single-dimensions. Second, we show that CRAs do not incorporate such risk reduction into their credit risk assessments. Our results are robust to endogeneity concerns and the use of two ESG rating providers. They can help guide policies that focus on rating agencies as a potential tool to address ESG concerns.