Sustainability Language

Sustainable Finance & Investment

Cost of capital

The minimum return a company must earn to satisfy its debt and equity providers, typically measured as the weighted average cost of capital (WACC).

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Definition

Cost of capital is the rate of return investors require for providing funds to a company — the cost of debt and the cost of equity combined, most commonly as the weighted average cost of capital (WACC), calculated by weighting each source's cost by its share of total capital, with debt adjusted for tax deductibility. It serves as the hurdle rate for investment decisions and the discount rate in valuation.

References

Overview

What it means

The price of money for a firm: riskier activities must promise higher returns to be worth financing.

How it is used

In sustainability, cost of capital is central to energy-transition finance — high capital costs in emerging markets impede clean-energy deployment — and to debates over whether strong ESG performance lowers financing costs.

Why it matters

The pace of decarbonisation is in large part a cost-of-capital story: lowering capital costs for clean projects (and raising them for polluting ones) reallocates investment at scale.

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