Impact of ESG performance and carbon emissions on cost of debt : A study of the Nordic markets

Abstract: The study examines the link between the Environmental, Social and Governance (ESG) performance of a company and its cost of debt, measured as credit spreads between corresponding corporate and risk-free government bonds, in Nordic countries between 2020 and 2022. No previous studies look at ESG effects on bond spreads in the Nordic markets, although their stakeholder-oriented nature could make them attentive to ESG issues. Additionally, public and regulatory attention to carbon dioxide suggest a value for companies in decreasing emissions. In line with previous studies on ESG top-level and individual pillar performance, Refinitiv ESG scores are used as proxies for ESG performance in the two initial regressions, and an additional regression is run where a measure of carbon intensity is substituted for environmental pillar performance. Although there is a risk of reverse causality inherent in this field, the findings in this study indicate that ESG top-level performance reduces cost of debt, while carbon intensity increases it. Notably, social pillar scores and carbon intensity, but not environmental pillar scores, have significant effects on spreads.