Does the Cost of Borrowing Increase to the Firms that are Socially and Environmentally Irresponsible?

We employ more than 20 measures of Irresponsible Environmental, Social and Governance (IESG) / Corporate Social Irresponsibility (CSI) to examine whether lending institutions penalise firms for engaging in socially and environmentally irresponsible activities by increasing the cost of borrowing. The sample consists of 34,689 firm-year observations for non-financial listed firms in 36 countries from 2002 to 2019 with clustered standard errors pooled regression and two-stage instrumental variable regression methods utilised in the analysis. We find that firms that engage in IESG/CSI practices have a higher cost of debt, with the impact more obvious in countries that perform better in terms of perceived corruption. The study produces policy implications for lending institutions, credit rating agencies and should also be of interest to policy makers and regulators tasked with developing ESG/CSR guidelines that require companies to report substantive ESG/CSR information that goes beyond the current symbolic disclosures provided by some companies. The results are shown to be robust to a battery of sensitivity tests, including alternative measures for the cost of debt and IESG/CSI practices