The Cost of Being Green: How ESG Ratings Affect a Firm’s Cost of Equity

Abstract

This paper examines the impact of ESG ratings on a firm's cost of equity (COE). We investigate this relationship over an 18-year period (2004 to 2022) using comprehensive data from the United States. We find that a one standard deviation increase in ESG ratings is linked to a significant 15 basis points increase in a firm's COE on average. This relationship is predominantly observed among S&P 500 firms or large firms, while its impact is less pronounced for energy-intensive firms. These findings highlight the importance of considering industry-specific dynamics, firm-level characteristics, and the broader investment climate when assessing the impact of ESG ratings on a firm's COE.

Keywords: ESG ratings, Socially Responsible Investing, Principles of Responsible Investment, Cost of Equity

JEL Classification: G11, G12, G32, G34, Q56