Does environmental performance reduce corporate financing costs? Evidence from U.S. listed firms

Abstract

This study examines the relationship between environmental performance and corporate financing costs using a panel sample of U.S. listed firms from 2013 to 2024. Environmental performance is measured by environmental scores obtained from S&P Global ESG data, while financing cost is proxied by firms’ interest expenses relative to debt obligations. To investigate this relationship, the study employs pooled OLS, fixed-effects (FE), random-effects (RE), and dynamic system GMM estimations. The baseline results indicate that better environmental performance is associated with lower financing costs, suggesting that capital markets reward firms with stronger environmental practices. The findings remain consistent across both FE and RE specifications. Furthermore, an interaction analysis reveals that financial leverage moderates this relationship. Specifically, the financing benefits associated with environmental performance are weaker for highly leveraged firms, implying that financial risk can partially offset the positive signal conveyed by environmental performance.To address potential endogeneity and the persistence of financing costs, a dynamic system GMM model is employed. The results suggest that financing costs exhibit substantial persistence over time, and the direct effect of environmental performance becomes weaker after controlling for dynamic effects. This finding indicates that historical financing conditions and firms’ financial structures remain important determinants of financing costs alongside environmental performance. Overall, the study contributes to the growing literature on sustainable finance by providing evidence that environmental performance can reduce financing costs, while highlighting the important role of financial leverage and financing persistence in shaping this relationship.