ESG performance, institutional factors, and the cost of debt

Institutional factors play a critical role in shaping the relationship between companies’ environmental, social, and governance (ESG) practices and their financial performance. This paper investigates how institutional factors influence the relationship between ESG practices and the cost of debt for non-financial firms globally, focusing on seven dimensions of governance quality and environmental resilience. Findings show that companies with superior ESG ratings operating in countries with high institutional quality benefit from a reduction in their cost of debt. Conversely, firms in countries with lower institutional quality do not experience the same advantage, underscoring the importance of effective governance and environmental resilience in fostering sustainable business practices. Results are robust to tests addressing endogeneity concerns and possible confounding factors, such as the COVID-19 pandemic. These findings provide insights for practitioners, financial institutions, and policymakers, highlighting the need to consider the institutional context when assessing the impact of ESG factors on financial outcomes.