The impact of ESG scores on the cost of debt in Finnish non-financial firms

This study examines the effect of the one-year lagged combined environmental, social, and governance (ESG) scores on the cost of debt for Finnish non-financial firms. This research uses an integrated theoretical framework that was built based on the lens of agency, stakeholder, legitimacy, and signaling theories. A multivariate linear regression model on panel data from 2004 to 2025 was used, with the accounting-based cost of debt as the dependent variable and the one-year lagged Refinitiv’s ESG total score as the independent variable. By examining 253 firm-year observations, the regression results indicate a negative relationship between ESG scores and the cost of debt one year later, suggesting that companies with better sustainability performance are rewarded with lower debt costs. Explicitly, a statistically significant negative relationship was observed: a one-unit increase in the ESG score reduces the cost of debt by approximately 0.4 percentage points. This finding supports the perspectives of stakeholder, legitimacy, and signaling theories, which argue that Finnish creditors perceive high ESG scores as a positive signal of high management quality, transparency, and legitimacy. It contradicts the overinvestment hypothesis in agency theory. This study’s objective is to fill the literature gap in the Finnish context, as few studies have examined this relationship in this specific geographic area. Moreover, this study’s results help corporate managers identify the incentives behind high ESG scores, thereby rationalizing investment in sustainability practices. Last but not least, via the lens of creditors and lenders, the results help evaluate the efficiency of ESG performance in the Finnish market.