MSCI ESG Ratings and Cost of Capital

A large body of research has found links between a company’s exposure to, and management of, environmental, social and governance (ESG) risks and its financial performance, for which the cost of capital plays a key role. The cost of capital determines the minimum rate of return a company needs to earn to satisfy its creditors and shareholders.

In this study, we sought to determine whether companies with higher resilience to financially material sustainability-related risks (as measured by MSCI ESG Ratings) have benefited from a lower cost of capital. We found a significant historical correlation between a company’s MSCI ESG Rating and its financing costs in both equity and debt markets, which we confirmed using the dynamic, market-determined proxies of stock beta and credit spreads, respectively.

Cost of capital across MSCI ESG Rating quintiles

Data period from August 2015 through May 2024. We divided the entire study sample (n = 4,319 unique issuers) into quintiles each month based on IAS score, which underlies the MSCI ESG Rating, and compared each quintile’s cost of capital monthly (106 observations). The difference between the top and bottom ESG quintiles over the study period was significant at a 99% confidence level using the Mann-Whitney U test. Source: MSCI ESG Research