Higher ESG Ratings, Lower Financing Costs

MSCI research covering more than 4,300 issuers from 2015 to 2024 found a significant historical correlation between MSCI ESG Ratings and financing costs in both equity and debt markets. For corporate leaders, the findings add financing costs to the range of factors that may be relevant when assessing sustainability risk management.

Higher-rated companies paid less to raise capital

Over the study period, companies in the highest ESG Rating quintile had an average cost of capital of 6.8%, versus 7.9% for those in the lowest quintile. This association remained even after controlling for home market, sector affiliation, credit quality and funding currency. In debt markets, higher-rated issuers traded at tighter credit spreads; in equity markets, they exhibited lower systematic risk (beta).

Large rating changes preceded shifts in financing costs

The study also examined whether changes in ESG Ratings were associated with subsequent changes in financing costs. One-notch rating changes showed no clear pattern. By contrast, companies that experienced significant rating upgrades or downgrades (two or more notches) subsequently saw their cost of capital decrease and increase, respectively.

What this could mean for your company

For chief financial officers (CFOs) and treasury teams, the findings provide another data point on the historical relationship between sustainability risk management and financing costs. For chief sustainability officers (CSOs) building the internal business case, cost of capital may be a useful metric to consider, given that companies with higher ESG Ratings were associated with lower costs of equity and debt than lower-rated peers in this study.