**Our Approach**

To analyse the impact of ESG ratings on a valuation we tested our hypothesis:

*“Companies with higher ESG ratings have a lower Cost of Capital compared to*

*companies with lower ESG ratings”*

To test our hypothesis, we investigated the relationship between ESG score and

beta to see the impact on Cost of Equity, as well as the relationship between

ESG score and credit spread to obtain the implications on Cost of Debt.

To obtain the ESG impact on Cost of Equity we performed a regression analysis,

regressing the sample of listed companiesʼ betas against the ESG score.

To obtain the ESG impact on Cost of Debt we regressed the credit spread of our

sample of listed companies against the ESG score.

For our analysis we used the data provider S&P Capital IQ with a sample of

10,318 listed companies from all around the world.

# Cost of Equity - Formula

Our formula for the effects of ESG score on CoE can be summarised as follows:

#### CoE (Discount) Premium= ESG-adjusted CoE - Market (base) CoE

➔ ESG-adjusted CoE = (1.047265569 - 0.001651737 * ESG) * MRP + RFR

➔ Market (base) CoE = (1 * MRP + RFR)**

#### CoE (Discount) Premium= (1.0473 - 0.0017 x ESG score) x MRP - MRP

Where

CoE = Cost of Equity

MRP = Market Risk Premium = 4.70%

**MRP = 4.7% & RFR = 2.4% (MRP corresponding to the global historical

average MRP, and RFR corresponding to last 5 years of US bond returns)

# Cost of Equity - Results

The table on the right side shows the relationship between the ESG score and Cost of Equity. It indicates that, on a market scenario with a Market Risk Premium of 4.7%, Market Beta of 1, and Risk Free Rate of 2.4%, every 10-point increase (decrease) in a companyʼs ESG score results in a 0.08% decrease (increase) in Cost of Equity.

The chart above shows the results of our regression analysis, delivering an R² of 31%, showing significance and thus forming the basis for our formula on the impact on Cost of Equity.

*The basis for our formula is derived from the standard

Capital Asset Pricing Model (CAPM).

# Cost of Debt - Formula

Our formula for the effects of ESG score on CoE can be summarized as follows:

#### CoD (Discount) Premium= ESG-adjusted Credit Spread - AVG Credit Spread

➔ ESG-adjusted Credit Spread = 0.015609946 - 0.0000865919 * ESG

➔ Average Credit Spread of the Sample = 1.38%**

#### CoD (Discount) Premium= (0.0156 - 0.0001 x ESG score) - 0.0138

Where:

CoD = Cost of Debt

Avg. Credit Spread = 1.38%

**The average credit spread comes from our sample of 10,318

analysed companies

# Cost of Debt - Debt

The table on the ride side shows the relationship between the ESG score and Cost of Debt discount or premium. It indicates that, given a Average Credit Spread of 1.38%, every 10-point increase (decrease) in a companyʼs ESG score results in a 0.09% decrease (increase) in Cost of Debt.

The above chart shows the results of our regression analysis, delivering an R² of 79% and therefore providing a significant statistical relationship between the impact of ESG score on the Cost of Debt.

This analysis is offering strong support for our hypothesis indicating that better ESG scores result in lower Cost of Capital (in this case Cost of Debt)