Authors: Chrysavgi Mitsi, Augustinos Dimitras
Title: The impact of environmental performance on the cost of bank debt: A selective review of the literature
Abstract
The growing interest in the effects of climate change and the need to reduce and control greenhouse gas emissions (GHG emissions), which are responsible for global warming, is reflected in several empirical studies. Bank loans are capable of mitigating firms’ carbon footprint, as they constitute an important source of corporate financing. Despite the already known negative relationship between environmental performance and loan spreads, existing literature indicates that the materiality of firms’ and loans’ characteristics in evaluating carbon risk is still unclear. Driven by the lack of consensus on the importance of firms’ and loans’ characteristics that shape lending decisions, the purpose of this paper is to critically examine the relationship between firms’ environmental performance and the cost of debt by collecting, categorizing, and discussing the attributes that influence this relationship. The paper demonstrates that, researchers use either environmental scores or actual GHG emissions to measure environmental performance, depending on their perceptions regarding the effectiveness of available data. In terms of firms’ characteristics, size, leverage, profitability, creditworthiness and the type of industry are widely used by researchers. As for the characteristics of loans, collateralization, purpose and type, maturity and performance pricing are mostly used. Moreover, control variables, either in terms of firms’ or loans’ characteristics, do not differentiate when the research involves solely the syndicate loan market but do differentiate when the geographic location changes. Although there is a trend towards the methodological approach used to investigate the relationship between environmental performance and cost of debt, the evolving nature of environmental activities, influenced by the attitudes of investors, shareholders, political leaders and the innovations in data availability, creates additional causal interpretations that necessitate further investigation.
Keywords: selective review · environmental performance · cost of debt · GHG emissions · climate change
JEL classification: G21 · G32 · Q51
