Sustainability Disclosures and Cost of Capital

Abstract

This paper examines the effect of sustainability performance disclosures on corporate cost of capital. We find that both cost of debt and cost of equity are lower for firms that disclose sustainability performance information, when compared to firms that do not disclosure similar information. We also explore the differential effect of sustainability performance disclosures on both cost of debt and equity and find that the effect is stronger for cost of equity. For corporations that disclose sustainability information, effects with respect to economic, governance, social, ethics and environmental sustainability performance are examined individually. Results show that sustainability disclosures pertaining to the economic, ethics and environment performance unambiguously lower both cost of debt and equity. Furthermore, disclosures regarding social and governance performance only lower cost of debt. Results have policy, practical and education implications by underscoring the value-relevance of currently voluntary sustainability reporting and assurance and a possible move toward improved standardized sustainability disclosures.

Keywords: Business Sustainability, Sustainability Reporting, Cost of Capital, Cost of Equity, Cost of Debt

JEL Classification: G14, G18, M21