Does the Cost of Capital Mediate the Link Between Sustainability Commitment and Innovation Intensity? Dynamic Evidence from Saudi-Listed Companies

Objectives This paper examines the triangular relationship between ESG engagement, the cost of capital, and innovation intensity, specifically whether the cost of capital mediates the link between a firm’s sustainability commitment and its innovation activities. Material and Methods To ensure robust estimates in a dynamic panel setting, we employ a two-step system generalised method of moments (GMM) estimator. We analyse a panel of 58 non-financial Saudi firms from 2016 to 2024, a period covering the launch and implementation of the ‘Vision 2030’ reforms. Results Higher ESG commitment lowers the cost of capital, which limits R&D investment; additionally, ESG engagement directly boosts innovation, confirming the expected bilateral relationship. This study primarily rejects the financial mediation hypothesis, finding that ESG’s indirect effect on innovation via capital costs is insignificant, while the direct strategic effect dominates. Conclusions In an institutional high-pressure environment, sustainable innovation is driven more by legitimacy and survival needs than by lower financing costs. Our findings challenge the idea that ESG’s value for innovation is about easing financial constraints; instead, it helps develop capabilities to address external pressures.