ESG scores and cost of capital: evidence from the UK

Purpose This study examines the impact of ESG scores on the cost of capital, utilizing ESG ratings from 115 UK companies listed on the FTSE 350 between 2019 and 2023. Design/methodology/approach The study applied static panel data linear regressions, and the data for 115 UK companies listed on the FTSE 350 were collected from the LSEG Datastream. Findings The empirical results reveal a significant positive relationship between ESG scores and the cost of capital, as measured by the cost of equity, cost of debt and WACC. Additionally, the results show that ESG scores are positively correlated with beta, suggesting that companies with high ESG performance may increase systematic risk, possibly due to the challenges of integrating ESG into corporate strategies. Practical implications These findings are particularly relevant for managers, shareholders and policymakers. In particular, the study highlights whether ESG practices lead to lower financial risk or impose short-term capital costs, thereby assisting firms in aligning their sustainability goals with financial performance. Originality/value This article is motivated by the low number of studies that examine the impact of ESG scores on the cost of capital and systematic risk and contributes to the academic literature on ESG by considering the European Union’s Corporate Sustainability Reporting Directive (CSRD).