There is an increasing flow of capital towards ESG investments, but there is no real understanding on what is the mechanism by which companies gain value from such investments. This Capstone's objective was to explore and analyze the relationship between ESG and the firm's cost of capital to develop an analytical framework that assesses a company's optimal ESG strategy. The Capstone team worked under the agile sprints methodology, working with two hypotheses for each sprint that were studied by conducting literature reviews, quantitative and data analysis, and case studies. 

Their initial approach was to look for a direct relationship between ESG rating and P/E ratios. The team found no direct relationship, but they did find a relationship between the volatility of total returns and ESG ratings. The team followed up this finding with a literature review and conducted their own data testing. They found that the relationship holds, especially for the energy sector, which is the industry the client was interested in the most. From the idea of ESG as a risk management tool, the Capstone team developed an analytical framework that aims to help companies mitigate risks and reduce financial volatility. The framework proposes a way to efficiently identify risks and prioritize the more impactful ones. The team tested their framework at the industry level with quantitative data analysis, and then conducted two case studies to test both the framework and the industry findings at the company level. Finally, the team connected this back to the cost of capital, since in theory, lower volatility eventually leads to lower WACC, hence lower cost of capital.