Elsevier

Utilities Policy

Volume 82, June 2023, 101555
Utilities Policy

Full-length article
Materiality investor perspectives on utilities’ ESG performance. An empirical analysis of ESG factors and cost of equity

https://doi.org/10.1016/j.jup.2023.101555Get rights and content
Under a Creative Commons license
open access

Highlights

  • The ESG score of utilities affects investors' risk perceptions, leading them to demand a lower rate of return.

  • The governance pillar is the only ESG dimension with a negative and significant association with the cost of equity.

  • Two specific ESG factors affect investors' perceptions of a firm's riskiness in the utility sector, namely the management characteristics (i.e., the structure and the compensation of the board of directors) and respect for human rights.

Abstract

The last years have seen significant growth in the demands and use of Environmental, Social, and Governance (ESG) data and ratings, which have relevant market implications and affect the value of firms based on prior evidence. However, little is known about the materiality of ESG factors to investors’ risk perceptions. This paper contributes to this debate by analyzing the relationship between the ESG performance of utility companies and the cost of equity capital. Using fixed-effect panel regressions on a sample of 273 firm-year observations between 2017 and 2021, this paper provides novel insights with significant theoretical and practical implications.

Keywords

ESG performance
Cost of equity
Materiality

Data availability

Data will be made available on request.

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