Do digitalization and governance boost the value of ESG?

Purpose Drawing insights from contingency and signaling theories, this study aims to examine when and how stronger environmental, social, and governance (ESG) performance contributes to a lower cost of equity (COE). More specifically, we explore the role of organizations' digitalization efforts and sustainability governance mechanisms, namely the presence of a sustainability committee and a chief sustainability officer (CSO) – as key factors that may shape this relationship. Design/methodology/approach Fixed-effects panel regressions are estimated on a sample of listed Italian non-financial organizations from 2017 to 2022. Additionally, robustness tests are performed to address potential endogeneity concerns and assess the sensitivity of the findings to alternative model specifications. Findings The study shows that the link between ESG performance and COE depends on how digitally advanced an organization is and whether it has governance mechanisms dedicated to sustainability. In other words, organizations that combine strong ESG performance with robust digital capabilities and governance structures benefit more from a reduced COE. Originality/value The findings deepen our understanding of the ESG performance–COE relationship, indicating digitalization and sustainability governance as key enablers of the financial benefits associated with ESG performance, as they act as credible signals to investors regarding the firm's commitment to ESG practices.