The moderating role of audit quality in the relationship between ESG practices and the cost of capital: Evidence from the United Kingdom

This study investigates the impact of environmental, social, and governance (ESG) performance on the cost of capital, using a sample of 406 non-financial companies in the United Kingdom from 2014 to 2023. We examined how ESG performance and audit quality influence the cost of equity (CoE), cost of debt (CoD), and weighted average cost of capital (WACC). The findings reveal a significant negative relationship between ESG performance and all three measures, indicating that strong ESG practices can reduce financing costs. Additionally, higher audit fees are positively associated with WACC and CoE, with a particularly pronounced effect on CoD. Engagement with Big 4 auditors moderates these relationships. Overall, the results demonstrate that ESG performance not only enhances corporate reputation and sustainability but also delivers financial advantages by lowering the cost of capital. These insights have significant implications for corporate financing decisions and provide guidance for managers, investors, policymakers, regulators, and government entities.