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ESG performance and the cost of debt. Evidence from the corporate bond market

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  • Fiorillo, Paolo
  • Meles, Antonio
  • Ricciardi, Antonio
  • Verdoliva, Vincenzo

Abstract

We study the impact of ESG performance on the cost of debt in the primary corporate bond market. Using an international sample of 25,234 bonds from 2677 ESG-rated issuers, we analyse yield spreads between bonds from high- and low-ESG-rated issuers, finding lower yields (by about 10 bps) for high-ESG firms. Our results are robust to additional tests, including controls for endogeneity, and are mainly explained by the environmental and social pillars. We also find that this result is driven by more developed financial markets, likely affected by lower information frictions, and by countries where bankruptcy rules guarantee higher protection for bondholders, making them more willing to grant ESG premia. Finally, we observe lower yield spreads for bond issues that occurred after the introduction of the SFDR, highlighting the importance of regulations promoting socially responsible investments. Overall, our results suggest that firms can benefit from superior ESG performance in the form of lower borrowing costs in the corporate bond market.

Suggested Citation

  • Fiorillo, Paolo & Meles, Antonio & Ricciardi, Antonio & Verdoliva, Vincenzo, 2025. "ESG performance and the cost of debt. Evidence from the corporate bond market," International Review of Financial Analysis, Elsevier, vol. 102(C).
    • Handle: RePEc:eee:finana:v:102:y:2025:i:c:s105752192500184x
    DOI: 10.1016/j.irfa.2025.104097
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    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth

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