ESG Performance and the Cost of Equity Capital: A Review of Evidence with Special Reference to India

Abstract

Environmental, Social and Governance (ESG) considerations have increasingly become part of corporate financial decision-making and investor assessment. One important question is whether better ESG performance enables firms to obtain equity finance at a lower cost. Existing research, however, does not provide completely uniform findings. Several studies argue that strong ESG performance and disclosure reduce information asymmetry, improve corporate reputation, lower perceived risk and attract a wider investor base, thereby reducing the cost of equity. Other studies suggest that excessive ESG expenditure, agency problems, greenwashing and disagreement among ESG rating agencies can increase uncertainty and financing costs. This paper reviews the theoretical and empirical literature on the relationship between ESG and the cost of equity, with particular emphasis on India. The review indicates that recent evidence increasingly supports a negative ESG-cost of-equity relationship, although the magnitude and direction depend on ESG dimensions, disclosure quality, institutional environment, industry characteristics and rating methodologies. The paper concludes that credible and standardized ESG reporting is particularly important in emerging markets such as India.

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DOI & Citation