Climate disclosure costs hurting ESG profits

Cost of equity at ESG firms not as rosy as investors expected, study finds.

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(Mark Hulbert, an author and longtime investment columnist, is the founder of the Hulbert Financial Digest; his Hulbert Ratings audits investment newsletter returns.)

CHAPEL HILL, N.C. (Callaway Climate Insights) — Your core beliefs about ESG investing may be all wrong.

Up until a just-released study, ESG-focused investors believed that they were rewarding “green” companies by lowering their cost of equity. That cheaper equity, of course, would allow those companies to undertake more ESG-friendly projects than otherwise.

According to the new study, however, the actual situation may be just the opposite: An increase in a firm’s ESG rating is linked to a higher cost of equity, not a lower one. The study, titled “The Cost of Being Green: How ESG Ratings Affect a Firm’s Cost of Equity,” was conducted by Alessio Galluzzi and Reuben Segara of the University of Sydney Business School and Fergus O’Donnell of Azure Capital, an Australian corporate advisory firm. They reached this surprising result after analyzing publicly traded U.S. companies between the years 2004 and 2022.

What might be the cause? The researchers speculate that a company must invest a lot of capital to convince investors that it has “a genuine dedication to promoting sustainability and ethical practices throughout its operations.”