Environmental scores and firm cost of debt – A study examining differences across industries and regions of Europe in the context of the EU Taxonomy

Abstract

The increasing interest in firms' ESG activities among investors has led to different attempts of measuring the environmental dimension, recently through the EU Taxonomy. This thesis investigates the impact of the environmental scores on the firm cost of debt. The sample consists of 3670 European firm-year observations from 2014 to 2020. The results show a statistically significant negative relationship between environmental performance and the cost of debt. Lenders are found to be more sensitive to environmental concerns in carbon-intensive industries, where the cost of debt is 1.32% above the reference group. For firms in carbon-intensive industries, a one standard deviation higher environmental score is equivalent to 50 basis points lower cost of debt. Since investors seemingly reward environmental sustainability, being Taxonomy aligned potentially eases financing constraints.