The Impact of Environmental Performance on the Debt Cost

Abstract

This study aims to explore whether enterprises with stronger environmental performance can benefit from lower debt financing costs, and it pay particular attention to the possible differences between high-pollution industries and low-pollution industries. The study utilized a panel dataset of 255 US-listed companies from 2010 to 2023, combining Compustat financial data with MSCI ESG environmental performance scores. Debt costs are calculated from dividing interest expenses by total debt. The model also uses enterprise size, leverage ratio and profitability as control variables. Mitigate unobserved heterogeneity by estimating panel regression that includes fixed effects of enterprises and years. The results of the baseline model indicate that there is a significant negative correlation between environmental performance and debt costs, suggesting that creditors tend to offer more favorable financing to enterprises with stronger environmental practices. The interaction model did not find significant differences in high-pollution industries, while sub-sample regression showed that this relationship was stronger and more stable among enterprises in low-pollution industries. These findings suggest that the financial benefits brought by environmental responsibility are obvious, but their intensity may depend on the industry context. This study contributes to the literature in the ESG and corporate finance fields by providing strong evidence that environmental performance can reduce debt costs, highlighting its strategic importance to managers and policymakers.