The Effect of Environmental, Social and Governance (ESG) on Capital Cost: Evidence from Korean KOSPI Firms

This paper examines the empirical association between environmental, social and governance (ESG) and the cost of capital(WACC) on Kospi firms. Based on the argument that ESG movement would benefit shareholders by reducing firms’ downside risk, measured using the lower partial moment and value at risk, this study hypothesized that ESG movement would affect the cost of capital. This study examined the effect of ESG movement on the cost of capital using a large sample of Korean firms. The ESG index announced by the Korea Corporate Governance Service (KCGS) was used as a measurement variable for ESG. The results of this study find that the capital cost borne by companies that actively carry out ESG activities was low. That is, ESG activities have a positive effect on the capital market and have the effect of lowering capital costs. In short, the firms with ESG movement exhibit the negative on the cost of capital.