Environmental Practices and Corporate Cost of Debt: Evidence from European Listed Firms

This paper examines the relationship between firms' environmental sustainability and the cost of debt, with a specific focus on how firms' transition efforts are taken into account. Using a dataset of large European listed companies covering the period from 2015 to 2023, we provide evidence that better environmental practices on polluting emissions, energy sources and waste management reduce firms' cost of debt. This result remains robust when environmental metrics are combined into a unique composite indicator and after testing for endogeneity. Further analysis shows that the reduction in the cost of debt is stronger for less sustainable firms engaged in environmental transition. Our findings shed light on the importance of considering firms’ transition needs and efforts for effective transition finance.