Environmental certification and debt financing: Evidence from Global Real Estate Investment Trusts (REITs)

The real estate sector can play a crucial role in the carbon transition due to its substantial contribution to energy consumption and carbon emissions. The number of environmentally certified residential and commercial properties is on the rise, and previous studies have shown that such certifications are associated with price and rental premiums. However, research on capital market dynamics in real estate remains limited. This study focuses on environmental certifications within REITs and explores their relationship with debt financing. Specifically, we examine the cost of debt, leverage ratio, and debt structure among REITs worldwide. Our sample includes over 300 REITs from 20 countries, spanning the period from 2002 to 2022. The study proposes several hypotheses. First, it posits a negative association between environmental certification and cost of debt financing. Second, we hypothesis that the relevance of environmental certification to real estate sector is crucial to have lower debt costs. Third, there is a negative association between environmental certification and leverage ratio. Fourth, environmental certification affects the debt structure of REITs. Fifth, the association between environmental certification and cost of debt financing is moderated by the climate risk level at the country level. The examination using pooled regression and propensity score matched sample provides some evidence supporting proposed hypotheses. First, the findings indicate a negative association between environmental certifications and the cost of debt financing. Second, we find that REITs’ general environmental management systems (ISO certification) is insignificant to cost of debt indicating that environmental certification specific to the real estate sector matters. Third, we find insignificant relationship between environmental certification and leverage. Fourth, the analysis shows that environmental certifications are positively correlated with the use of unsecured debt and fixed-rate debt, suggesting the financial flexibility and reduced interest rate risk of debt. Finally, we find that climate risk level positively moderates the relationship between environmental certification and debt costs.