Environmental Performance and the Cost of Capital: Evidence from Commercial Mortgages and REIT Bonds
There is a lively debate on the impact of environmental performance on a firms cost of capital, but many academic studies are hindered by methodological challenges. The real estate sector, which is at the nexus of major environmental and energy issues, offers a laboratory to address the relationship in a direct manner. Using a sample of U.S. REITs, we investigate the spreads on commercial mortgages collateralized by real assets. We also study spreads on corporate-level debt, both at issuance and while trading in the secondary market. The results show that environmentally certified buildings command signicantly lower spreads compared to conventional, but otherwise comparable buildings. The spread difference varies between 35 and 36 basis points, depending on the specification. At the corporate level, we document that REITs with a higher fraction of environmentally certified buildings are able to issue bonds at lower spreads, after controlling for a broad set of REIT and bond characteristics. A difference-in-difference analysis of bond spreads in the secondary market corroborates this finding. The results in this paper provide evidence that the capital market prices in the environmental performance of the collateral underlying financial products.