The financial benefits of sustainability: analyzing the impact of sustainable finance on capital costs for London stock exchange firms

Corporations that implement sustainable financial strategies experience a reduction in borrowing costs. A broader range of investors, particularly those prioritizing ESG considerations, is typically attracted to these firms. Investors view a high cost of capital as an indicator of high risk, requiring a higher return to mitigate that risk. This study utilized the resource-based view (RBV) theory to examine the impact of investments in sustainable finance on the cost of capital. The selection of companies was guided by rigorous inclusion criteria, and a purposive sampling strategy was employed to collect 18 years of data from 227 companies listed on the London Stock Exchange between 2006 and 2023, using Thomson Reuters Eikon DataStream. The study employed the common correlated effects mean group (CCEMG) and two-step generalized method of moments (GMM) estimation methods to analyze the relationships between the variables. The findings indicate that green bonds issued, CSR expenditures, and investments in renewable energy positively and significantly impact the cost of debt, equity, and weighted average cost of capital (WACC). Conversely, sustainable-linked loans negatively and significantly affect the cost of debt. Additionally, the moderating relationship between a firm’s age and the issuance of green bonds positively and significantly impacts the cost of debt, cost of equity, and WACC. To enhance their appeal to socially conscious investors, companies should demonstrate transparency regarding their environmental benefits, thereby boosting investor confidence in the organization.