The relationship between cost of equity and ESG: the effect of COVID-19

Abstract

Several prior studies report that environmental, social, and governance (ESG) initiatives temper the cost of equity. More recent studies show that COVID-19 increased the cost of equity. It is unclear whether the ESG mitigated the higher cost of capital during the COVID period. I focus on studying this using ESG and basic financial data for the period ranging from 2015 to 2022 based on U.S. and Canadian firms listed on NYSE, AMEX, and NASDAQ. The results show that the increase in the cost of equity during the COVID period concentrates less on firms with high ESG performance scores, suggesting ESG mitigated the increase in the cost of equity. This is consistent with the insurance-like effect of ESG on the cost of capital, cushioning the increase in the cost of capital during uncertain periods. In addition, my study reveals that the amplified ESG benefit in cost of equity reduction can be moderated by levels of industrial GDP growth and the stringency of the COVID-19 government policy.