Does a Company’s Environmental Performance Influence Its Price of Debt Capital? Evidence from the Bond Market

Abstract

Previous studies suggest that a higher level of corporate social responsibility (CSR) is associated with a lower cost of equity capital. However, there are very few studies on the link between CSR and the cost of debt, particularly on the effects of the environmental aspect of CSR on the cost of debt. As one of the first attempts to study the effects of corporate environmental performance on the cost of debt, this article contains an analysis of a sample of 5,260 bonds issued in the EU and US markets over the 2016–2018 period. The findings suggest a negative association between environmental performance and the cost of debt, proxied as coupon rates, which means that higher environmental performance helps reduce the cost of debt financing through bond issuance. Such effect is consistent across bond maturities.

TOPICS: ESG investing, fixed income and structured finance, developed markets, performance measurement

Key Findings

• ▪ Environmental performance is negatively associated with the cost of debt, meaning that the lower the corporate environmental performance, the higher the cost of debt.

• ▪ The integration of environmental factors into investment processes and decision-making is apparent along each debt maturity.

• ▪ Assigning bonds specifically to green projects or activities by firms may not necessarily lower the cost of borrowing.