It is often taken for granted that sustainability reduces a company’s cost of capital. This column argues that the relationship is significantly more complex and depends on a number of factors. It highlights an important distinction between the ‘cost of capital’ and ‘expected cash flow’ channels, which may lead to similar final outcomes but imply different underlying mechanisms. Additional factors, such as the level and nature of systemic risk, the amount of risk aversion, and the cyclical behaviour of public trust in business, are also crucial in determining whether sustainable companies enjoy a lower cost of capital.
It is often claimed that sustainability reduces a company’s cost of capital – i.e. the return it needs to offer its investors to raise funds.Read More »