The Effect of Environmental Performance on Financial Debt. European Evidence

European firms are under pressure from regulatory authorities and other stakeholders to identify suitable strategic approaches to reducing carbon emissions, as having such strategies has become an increasingly important business issue. In this context, the literature on the link between financial performance and environmental performance has not obtained conclusive results and the role of debt has not been considered yet. This study analyzed the impact of firms' reductions of carbon emissions on the financial leverage of all listed firms included in the main stock index of 16 European countries by using panel data regression analysis. The carbon risk and tangibility of capital expenditures were found to be the primary drivers of the use of financial debt. The results showed that the general positive impact of carbon emissions on financial debt that was induced by the role of emissions as an indicator of activity was mitigated by firms' carbon environmental performance. Thus, a better carbon performance allowed industrial firms to obtain more long-term financial debt to finance their relevant environmental investments