How do ESG ratings impact the cost of debt?
: a study on european firms

  • Afonso de Sousa Gomes Casqueiro Murta (Student)

Student thesis: Master's Thesis


Sustainability is an unavoidable subject of the 21st century, and research has gone into understanding financial advantages companies may have from being more sustainable. This research paper explores the link between environmental, social and governance (ESG) ratings of European firms and their cost of debt capital – a relationship hypothesised to be negative. With multiple regression analysis, including controls for firm characteristics, year and sector fixed effects, this dissertation identifies a possible concave quadratic relationship. Regressed variables are lagged one period in relation to the dependent variable, to address endogeneity issues. In the general sample, the relationship between the variables is positive, but by subdividing the sample into quintiles of the ESG rating distribution, a negative relationship is found in top quintiles while the positive relationship is still seen in lower quintiles. The conclusion of this dissertation is threefold: (1) the top 20% ESG performers have a statistically lower average and median cost of debt than the bottom ones, meaning the firms that have the top ESG ratings are better off in the debt markets; (2) on average, higher quintiles of the ESG rating see a negative relationship with the cost of debt; and (3) the coefficients of the ESG rating squared are all significant, thus confirming a significant concave relationship between the ESG rating and the cost of debt. The results, arguably economically modest, reveal an added benefit for companies that operate sustainably, besides ethical reasons or the other financial benefits identified by previous literature.
Date of Award28 Jun 2021
Original languageEnglish
Awarding Institution
  • Universidade Católica Portuguesa
SupervisorLei Zhao (Supervisor)


  • Sustainability
  • Environmental-social-governance
  • ESG
  • Corporate social responsibility
  • CSR
  • Cost of debt capital
  • Stakeholder theory


  • Mestrado em Finanças

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