Marginal Effects of Dynamic ESG Factors on the Capital Cost of Highly Leveraged Companies

This article reviews recent researches related to the marginal effects of dynamic Environmental, Social, and Governance (ESG) factors on the capital cost of highly leveraged companies. It summarizes how ESG performance impacts the cost of capital for firms with elevated debt levels, and explores substantially grand theories, namely agency theory, stakeholder theory and dynamic capabilities theory, to explain how ESG commitments positively influence company valuation metrics. Results demonstrate that improvements in ESG performance significantly reduce capital costs by mitigating agency problems and enhancing investor confidence. However, most studies consider the ESG factors to be homogeneous across industries and unchanging over time, result in the lack of full consideration to measure a specific influence on capital cost coming from temporal changes in ESG metrics. This work advances existing literature by considering ESG metrics as dynamic, time-sensitive variables rather than static indicators, offering novel insights into the interplay between sustainability practices and financial risk in highly leveraged contexts. It is suggested that more efforts needed on making cross-sector comparisons and include qualitative evaluations of companies' ESG strategies. The findings underscore the strategic relevance of dynamic ESG management for cost optimization and sustainable financing in high-leverage scenarios.