As ESG investing becomes more popular, companies with poor ESG credentials face rising costs of capital, either because their cost of debt increases (banks already incorporate ESG factors in their lending criteria and charge lenders with higher ESG risks more) or because their cost of equity capital increases. On the latter one, though, the evidence is very weak or non-existent.
One thing we know is that divestment campaigns don’t affect the cost of equity capital of a company. In theory, divesting from a certain industry should push the share price lower and thus increase the cost of equity capital. But a recent study confirmed once more that the price impact of divestment or low ESG credentials is on average zero. The study looked at the share price impact of inclusion in a widely held ESG index, in this case, the FTSE4Good index. In the United States, stocks that are included in the FTSE4Good index on average experience a return boost of 0.24% from that inclusion – too small to be significantly different from zero and certainly not meaningful for investors. Getting a good ESG rating and being included in ESG indices does nothing to reduce your cost of equity capital and as a result, divestment campaigns do nothing to meaningfully influence the share price or the cost of equity capital either.