Although dating back to the 1960s, corporate sustainability has been more widely
studied since the 1990s. (Bergquist, 2017) Some studies have indicated corporate
sustainability leads to significant benefits for capital price and elevated financial
performance, but the overall academic results have been inconclusive. This study
investigates the relationship between sustainability performance and the cost of eq-
uity in the Nordic markets. The investigation is done by observing the overall rela-
tionship and comparing the relationship through different ESG performance levels.
The study is conducted with companies under Directive 2014/95/EU mitigating the
effect of voluntary disclosures. This paper interchangeably uses the terms corpo-
rate sustainability, corporate social responsibility (CSR), and ESG performance.
The OLS multiple regression model is used to study the relationship between the
independent and dependent variable. Highly referenced 2000s and 2010s ESG
studies are closely followed when defining the model variables. The dependent
variable (cost of equity) is estimated with ex ante implied cost of equity model.
MSCI ESG rating is the proxy for the independent variable (ESG performance).
The study follows the article by Ghoul et al. (2010) selecting the control variables
excluding the long-term forecast and including analyst count from Botosan (1997).
The method to compare the difference in the relationship with different ESG per-
formance levels is done by following the basics of Dhaliwal (2011).
The results indicate a negative relationship between the cost of equity and the cor-
porate sustainability performance in the Nordic market. Sustainability performance
is seen to cause a lower cost of equity through an elevated investor base and lower
perceived risk. This negative effect is at its strongest when the firm’s ESG level is
near the market’s median value. The cause of this is multi-dimensional. Study
shows that significantly exceeding the market’s median level brings no financial
benefit.
