ESG: The Nexus of Sustainability & Cost of Capital? An empirical study of the relationship between ESG scores and WACC for European firms

Abstract

This thesis examines the relationship between STOXX Europe 600 firms’ ESG scores and their weighted average cost of capital (WACC) across the 11 Global Industry Classification Standard (GICS) sectors. To investigate this relationship, we have collected ESG scores from Sustainalytics and Refinitiv on an aggregate level, as well as individual ESG pillar scores. The ESG scores have then been averaged to create a proxy ESG score to account for divergence between the two rating agencies. Data on market capitalization, debt to total capital, and GICS sector have been gathered from Bloomberg. We investigate the WACC-ESG score relationship through five hypotheses spanning from a general to more granular assessment. Our findings suggest that although there is a significant negative relationship between WACC and ESG scores on an aggregate level, this does not hold when delving into sector specific differences where only a few sectors show a significant relationship, and only with certain ESG pillars. This implies that we do not find convincing empirical evidence to support the causal conclusion that European firms can benefit from lower average costs of capital by improving their ESG scores without accounting for sector.