CORPORATE PROFITABILITY AND COST OF CAPITAL EVALUATION OF ESG PERFORMANCE: EVIDENCE FROM A MULTI-INDUSTRY ANALYSIS

Abstract

This research investigates the relationship between Environmental, Social and Governance (ESG) performance and earnings, measured by Return on Assets (ROA) and Weighted Average Cost of Capital (WACC) respectively. By cross-sectionally analysing 1,000 companies from various industries that were publicly listed from 2018 to 2022, this study integrates regression analysis to determine the influence of ESG performance on these financial metrics. The findings show that while companies with higher ESG scores perform better on their operational profitability measured by ego a Higher Return on Asset (ROA) ratio companies that have more substantial ESG performance, the likely uses of a company’s assets in the scope of the business production are wider. Additionally, there was also an observed inverse relationship between the ESG performance and WACC, this implies that WACC decreased for corporations who have high ESG ratings because these investors believe that their investment has lower risk. These results comply with stakeholder as well as agency theoretical principles, they explain that including ESG in business is both about the stakeholders’ concern and creating value for the shareholders by boosting profits and lowering the costs of financing. This research sheds additional light in the regard of intersection of corporate finances and sustainability aspects providing policy recommendations applicable for managers of corporations, investors and policymakers with regard to ESG investment and its financial implications. Research that is focused on causal relationships should involve time dimension data as well as taking in consideration specific characteristics of the econometric sectors in which ESG effects are analysed.