ESG Performance and the cost of debt

This study examines the relationship between firms’ Environmental, Social, and Governance (ESG) performance and the cost of debt in the European Union, focusing on the impact of Directive 2014/95/EU (Non-Financial Reporting Directive, NFRD). The findings suggest that better ESG performance is associated with lower financing costs, with this effect strengthened by the NFRD through improved transparency and standardized disclosure. The study also shows that while the ESG effect is stronger in bank-based systems, the NFRD particularly amplifies its impact in market-oriented countries, where creditors rely more on public ESG information. Overall, the research highlights the importance of credible ESG reporting in fostering sustainable finance.