Environmental performance and cost of finance: evidence from emerging markets

Abstract

PurposeThis study aims to investigate the effects of environmental performance (EP) of firms and its pillars on both cost of debt and equity (COF) in emerging market context.Design/methodology/approachThis study uses 4,152 firm-year observations covering the years 2015–2019 from 17 emerging market countries. Data are obtained from ASSET4 and Datastream databases. OLS method with country, industry and year fixed effects are utilized in the main analysis of the study. Several robustness tests including 2SLS IV method are performed to test the sensitivity of the results.FindingsThe results suggest that aggregate EP of firms has reducing effects on both cost of debt and equity. All EP pillars have negative effects on the cost of debt while only emission performance has negative significant impact on cost of equity. This reveals that the effects of EP on cost of equity is mostly driven by emission performance of firms.Practical implicationsGiven differences between emerging and developed countries in terms of environmental regulations, infrastructure and technology, it is suggested that regulatory bodies and governments urge firms to implement environmentally friendly policies. Besides, implications for emerging markets for capturing more shares from responsible investments are provided.Social implicationsAlthough the adoption and implementation of environmentally-friendly policies are costly, improved environmental performance has financial advantages, including lower COF for firms. Therefore, firms would benefit from improving their EP in order to protect the nature, as well as to enjoy the economic benefits of better EP.Originality/valueThis study confirms that improved environmental performance has financial advantages for firms in emerging markets, such as lower COF.