ESG AND THE COST OF CAPITAL: EXAMPLES FROM EASTERN EUROPE BANKING INDUSTRY

This paper aims to test the hypothesis that higher ESG scores lead to a lower cost of capital for publicly traded companies in Eastern Europe. In recent years, ESG factors have become increasingly important in the investment industry, influencing the cost of capital for publicly traded companies from banking industry. As companies seeking capital are increasingly scrutinized based on ESG factors, most publicly traded companies publish ESG disclosures and strive to be ESG compliant. Although there is no definitive governing body for ESG, capital providers benchmark companies based on ESG scores—either internally created or from external providers—and integrate these scores into their investment decisions. With cost of capital on the rise during previous period, the authors want to test the hypothesis that ESG score have positive influence on the cost of capital for public companies in banking industry, with lower cost of capital compared to their peers. Using the Weighted Average Cost of Capital (WACC), this paper breaks down the cost of capital to test the effect of ESG scores on both the cost of debt and the cost of equity for publicly traded banking corporations from Eastern Europe.