The Impact of Environmental, Social, Governance Performance of Listed Companies on Financing Costs from a Dynamic Perspective

Abstract

Based on a dynamic perspective, this paper analyzes the impact of listed companies' Environmental, Social, Governance (ESG) performance on corporate financing costs, focusing on solving the problem of how companies can improve ESG to more significantly reduce financing costs. The dynamic perspective in this paper refers to two types of dynamic attributes that characterize ESG from a time dimension: one is the annual improvement rate, and the other is the intra-year volatility (based on the variance of quarterly ratings). This paper found that for every 1 unit increase in the ESG improvement speed (ΔESG), the debt financing cost was significantly reduced by 0.2% (p<0.01), while for every 1 unit increase in the ESG volatility (σESG) over a year, the financing cost increased by 0.3% (p<0.01). Concurrently, the negative impact of ESG ratings on financing costs has a threshold of 4.044 in the Huazheng nine-level system. The research significance of this paper lies in revealing the mechanism by which ESG affects financing costs: the faster the ESG improvement, the more significant the reduction in financing costs; high ESG volatility within the year will generate a financing premium; at the same time, there is a threshold for the impact of ESG ratings on financing costs. Accordingly, this paper recommends that firms prioritize sustained, low volatility ESG upgrades and strive to cross—and remain above—the 4.044 threshold.