ESG controversies and the cost of debt and equity: Evidence from Europe

This study explores how ESG controversies affect to the cost of debt and equity. On a sample of 474 non-financial firms listed on the STOXX Europe 600 from 2016 to 2023, we show that ESG controversies significantly affect both categories of financing costs. The effects vary across ESG sub-pillars and are influenced by factors such as country-level regulatory quality, firm size, and default probability. Furthermore, based on Legitimacy Theory, we identify market uncertainty as a key transmission channel: ESG controversies raise questions about a firm’s legitimacy to operate, prompting stakeholder concerns about future conduct, regulatory fines, and profitability, ultimately worsening financing conditions.