Sustainability Reporting, Global Uncertainty, Cost of Capital and Firm Performance: The Case of Global Energy Industry

Abstract

This study examines the impact of ESG (Environmental, Social, and Governance) performance on financial metrics within the energy sector, focusing on cost of capital and firm performance, with moderating factors such as the World Uncertainty Index (WUI) and Climate Vulnerability Index (CVI). The first study investigates how ESG performance affects the cost of capital measured as weighted average cost of capital (WACC), cost of equity, and cost of debt in energy firms. Using ordinary least squares regressions and longitudinal data from the LSEG database, findings reveal that higher ESG scores, including individual pillar performance (Environmental, Social, Governance), consistently reduce all three cost-of-capital measures. The WUI significantly moderates this relationship, amplifying ESG’s cost-lowering effect amid global uncertainty, offering energy managers a pathway to optimize capital structure while enhancing sustainability. The second study explores ESG’s impact on firm performance proxied by return on assets (ROA), return on equity (ROE), and earnings per share (EPS), across 700 energy firms from 2007–2023, analyzed through panel regression. Results indicate that robust ESG practices, particularly the Social Pillar (e.g., employee relations), strongly enhance ROA and ROE, while the Environmental Pillar drives EPS, underscoring the financial benefits of sustainable practices. Midstream and Downstream energy sectors show the strongest ESG performance links, with the CVI revealing that climate-vulnerable firms with high ESG scores maintain profitability during environmental stress. Collectively, these findings highlight ESG’s transformative potential in reducing financing costs and boosting performance, moderated by uncertainty and climate risks. For practitioners, integrating ESG offers a dual benefit of financial efficiency and resilience, while policymakers can leverage these insights to strengthen ESG reporting and address climate vulnerabilities like biodiversity loss and extreme weather. This research bridges gaps in ESG literature, emphasizing its critical role in shaping energy sector stability and sustainability.