ESG Performance, Cost of Capital and Operational Profitability: Evidence from the S&P 500 and STOXX Europe 600

As sustainable finance continues to evolve, the financial materiality of Environmental, Social, and Governance (ESG) performance remains a subject of intense debate, particularly across divergent regulatory landscapes. This thesis investigates the association between ESG performance, the Cost of Capital (WACC) and operational profitability (ROA). Specifically, it contrasts the European Union's mandate-driven "double materiality" approach with the United States' voluntary, "financial materiality" framework. Utilising a firm-year panel dataset of 5,076 observations from 731 firms retrieved from the Refinitiv Eikon database, the study analyses non-financial constituents of the S&P 500 and the STOXX Europe 600 indices over 2019-2025. The empirical strategy compares Fixed Effects models with firm and calendar-year effects against a preferred specification with firm and region-by-year effects, isolating region-specific macroeconomic shocks. A one-year lagged ESG Score is also used to mitigate reverse-causality concerns. The results show that the negative ESG-WACC association loses significance once region-by-year effects are introduced, while ESG shows no significant association with ROA, and no robust EU-US difference emerges.