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