Environmental Performance and the Cost of Capital: Evidence from Commercial Mortgages and REIT Bonds

Working paper (March 2018), together with Piet Eichholtz, Nils Kok (Maastricht University) and Erkan Yönder (Oyzegin University).


The increasing societal focus on environmental issues leads to important questions about the relationship between corporate environmental (ESG) performance and financial performance. Research on the impact of environmental performance on firms' cost of capital remains especially scant. The real estate sector offers a laboratory to address the relationship in two distinct manners, while specifically addressing concerns about endogeneity. We first investigate the spreads on commercial mortgages collateralized by real assets, some of which are environmentally certified. We then study spreads on corporate debt of property companies (REITs), both at issuance and while trading in the secondary market. The results show that loans on environmentally certified buildings command lower spreads than conventional, but otherwise comparable buildings, varying between 26 and 32 basis points, depending on the specification. At the corporate level, REITs with a higher fraction of environmentally certified buildings experience lower bond spreads in the secondary market. These results are robust to different estimation strategies, and signals that the debt market efficiently prices in environmental risk.