The Impact of ESG Reputational Risks on Financing Costs: The Case of Korean Wholesale and Retail Trade Firms

Abstract

Purpose: This study examines whether ESG reputational risks increase firms' financial frictions and weaken growth prospects, with a focus on Korean wholesale and retail trade firms that are particularly exposed to public perception due to their proximity to final consumers. Research design, data and methodology: We measure ESG reputational risks using two media-based indices: the RepRisk Index (2012-2023) and Who's Good ESG Incident Scores (2019-2023). We link these measures to financial constraint indices, the implied cost of equity, and Tobin's Q for KOSPI-listed wholesale and retail firms, and test the effect of ESG risk using quarterly data in a two-way fixed effects framework with controls for firm financial characteristics. Results: ESG reputational risks significantly increase financial constraints, raise the cost of equity, and reduce growth opportunities for Korean wholesale and retail firms. These effects, however, are attenuated among the largest retail firms in the KOSPI200, possibly due to their size, profitability, credit ratings, and chaebol affiliations. Governance-related risks remain salient even in this subsample. Conclusions: The findings highlight the financial consequences of ESG reputational risks for consumer-facing firms and suggest that ESG-related reputation management should remain central to corporate strategy.