Abstract
This thesis investigates the role of the relevance to Environmental, Social and Governance (ESG) risk factors or ESG relevance in corporate outcomes. It employs a novel ESG relevance score by Fitch Ratings and studies its impacts on firm performance, cost of capital and cost of debt issuance. The ESG relevance score has a familiar structure to the commonly used ESG scores and provides environmental, social and governance pillars. However, it is a risk- oriented measure and from a creditor perspective. Accordingly, this thesis consists of three main empirical chapters. Chapter 2 is the first empirical chapter.It examines the impacts of ESG relevance on firm performance over a sample consisting of 663 firms from 55 countries. Firm performance is measured by market and accounting-based indices, such as Tobin’s Q and ROA (Return on Assets). Chapter 2 demonstrates that environmental relevance has a negative and statistically significant relationship with Tobin’s Q and ROA. The result indicates that a firm’s relevance to environmental issues is perceived as a risk factor, leading to reduced market performance and profitability. More importantly, its negative impact offsets and outweighs the positive impact of environmental performance, leading to an overall negative impact on firm performance. The findings are consistent during endogenous checks via instrumental variable (IV) regression and Propensity Score Matching (PSM) analysis. Chapter 3 is the second empirical chapter. It examines the relationship between ESG relevance and cost of capital. Cost of capital is measured by the weighted average cost of capital, cost of debt and cost of equity. Utilising Chapter 2 sample, Chapter 3 finds that ESG relevance does not directly have a significant impact on the cost of capital. Nonetheless, environmental relevance indirectly affects the weighted average cost of capital and cost of equity by interacting with environmental performance. Particularly, lower these financing costs for higher environmental performance becomes more pronounced for firms with higher environmental relevance. The findings suggest that capital providers view environmental relevance as a moderating factor which emphasises the influence of environmental performance on cost of capital. The result is consistent across several robustness tests, such as IV regression and PSM method. Chapter 4 is the final empirical chapter. It examines whether and how ESG relevance has financial implications on the cost of bond issuance. It employs a larger sample that consists of 1,424 observations for 382 firms from 39 countries and demonstrates that ESG relevance does not have a direct impact on bond issuance. On the other hand, environmental relevance interplays with environmental performance and has a combined effect on bond yield. To be specific, lower bond yield for higher environmental performance is more pronounced for firms with higher environmental relevance. This finding reinforces the conclusion that bondholders consider environmental relevance as a moderating factor that amplifies the positive impact of environmental performance on bond yields. It is also robust through IV regression and PSM analysis. The findings of this study highlight the importance for firms, investors, and policymakers to consider not only ESG risk factors - particularly environmental risks – but, more importantly, the degree of relevance to these risks when evaluating firm outcomes, making investment decisions and developing regulatory policies.
| Date of Award | 27 May 2025 |
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| Original language | English |
| Supervisor | Artur Semeyutin (Main Supervisor) & Nodir Karimov (Co-Supervisor) |