From water efficiency to SDG disclosure: Understanding their impact on firm financing costs

Growing water scarcity and increasing regulatory and investor attention to environmental sustainability have intensified interest in how corporate water practices are priced by capital markets. Against this background, this study examines how water-related sustainability practices influence the cost of capital of U.S. non-financial firms and how these effects vary with ESG performance. Using a panel of 1207 firms listed in the S&P 1500 over 2015–2024, we apply a dynamic two-step System GMM estimator to address endogeneity, firm-specific heterogeneity, and persistence in financing decisions. Water sustainability is captured through two operational indicators (Water Recycled Score and Policy Water Efficiency Score) and two disclosure indicators aligned with the Sustainable Development Goals (SDG 6: Clean Water and Sanitation; SDG 14: Life Below Water). Results show that strong operational water governance, particularly water recycling and water efficiency policies, significantly reduces the weighted average cost of capital, as well as the cost of equity and debt. SDG 6 disclosure is also associated with lower financing costs, indicating that operationally relevant water transparency is financially valued. In contrast, SDG 14 disclosure increases all components of the cost of capital, suggesting that ecosystem-oriented commitments may signal long-term environmental liabilities or costly compliance expectations. ESG performance plays a moderating role by strengthening the cost-reducing effects of operational water governance while amplifying the cost-increasing impact of SDG-related disclosures. The findings demonstrate that capital markets distinguish between substantive water efficiency actions and broader ecological disclosures, contributing to the sustainability–finance literature by revealing the heterogeneous pricing of water-related SDGs.