An analyst assesses a company as below average on ESG metrics. All other matters being equal, she is most likely to:

A company that is assessed as below average on ESG metrics is likely to be viewed as having higher risks associated with environmental, social, and governance factors. These risks can include potential regulatory changes, reputational damage, and operational inefficiencies which may affect the company's long-term sustainability and profitability.

Increasing the company’s cost of capital reflects a recognition of these risks. Investors typically require a higher return when investing in companies perceived as having greater risk, which leads to a higher cost of equity. Consequently, a company assessed negatively on ESG metrics would likely face an increased cost of capital due to the additional perceived risks that could negatively impact its financial performance.

This adjustment in the cost of capital is crucial for accurately assessing the company's value and risk profile in financial models, such as Discounted Cash Flow (DCF) analysis, where discount rates are pivotal in determining the present value of future cash flows. A higher perceived risk necessitates a higher discount rate, thereby reducing valuations and accurately reflecting the potential negative implications of poor ESG performance on expected returns.