CSR and cost of debt in three European countries

Our study examines the impact of Corporate Social Responsibility (CSR) on the weighted average cost of capital and interest-bearing cost of debt to understand how a company's ethical, environmental, and social practices influence its financial performance, particularly the cost of obtaining funds. Our sample includes firms from three major European markets: Germany, France, and Italy. European companies with strong CSR practices are often less risky because they are more likely to avoid environmental fines and reputational damage. Lower risk can lead to a reduced cost of capital. Hence, we want to provide a comparative analysis of these markets. This paper employs an analytical approach grounded in the results of the original research. ESG and its components affect the cost of capital (weighted average cost of capital, cost of debt). Implementing CSR practices will likely reduce firm risk and cost of capital. A firm may attract investors by focusing on sustainable or ethical investments. CSR practices can be viewed more favorably by credit rating agencies and, consequently, lenders, which can improve a company's financial position by implying the ability to raise capital at a lower cost, resulting in better financial outcomes. Corporate social responsibility (CSR) is actively studied today. European countries are among the world's best in terms of Sustainability. We focus on CSR, weighted average cost of capital (WACC), and interest-bearing cost of debt. Our sample includes 120 companies from three European countries. We use fixed effect panel regression and IV-GMM to address the endogeneity issue. Our data ranges from 2008 to 2023. Our findings reveal negative relationship between CSR performance (as measured by ESG) and the cost of interest-bearing debt, as well as between CSR performance and the weighted average cost of capital (WACC). CSR's effects on the WACC, and interest-bearing debt are negative. Companies achieve higher ESG scores and improve their performance, which leads to a decline in the cost of borrowing. The ESG score serves as a measurement of CSR performance. There was a gap in the research that this study fills by providing a thorough examination of CSR performance and WACC, as well as the interest-bearing cost of debt for a group of European companies spanning the period that includes the global financial crisis and COVID 19.