How Does a Firm’s Focus on ESG Factors Affect its Cost of Debt? Investigating Regional and Industry level ESG Materiality Factors and their Effect on Firm Cost of Debt.

Abstract

As ESG risk and ESG materiality concepts become increasingly important to firm and lender-level decision making, our paper aims to investigate the dynamic factors affecting industry and regional-level materiality. Our paper is the first to construct a materiality map on a regional level and contrasts this with the SASB sector-level materiality map. We use ESG incident frequency as a proxy for firm ESG performance and find evidence for industry-level materiality, which is largely consistent with findings by Khan et al. (2016). We also compare the effects of regional and industry material ESG incidents against overall ESG incidents, which include material and immaterial topics, and find that industry materiality related ESG incidents are the most important factor in increasing a firm’s cost of debt. For MNE’s developing ESG policies, we suggest a global versus local approach to ESG performance based on industry-level standards.