What is the extent of the impact of a firm's environmental performance on credit risk and its ability to obtain financing ?

Abstract

This thesis investigates the extent to which firm-level environmental performance influences credit risk and financing outcomes, focusing on a large sample of European firms from 2015 to 2024. Building on the frameworks of Wang and Yang (2023) and Huang, Kerstein, and Wang (2018), the study disaggregates environmental performance into three dimensions : emissions, resource use, and environmental innovation , to identify which aspects are most relevant to financial outcomes. Credit risk is assessed using both the Altman Z-score and Refinitiv’s Combined Credit Rating, while financing outcomes are analyzed through profitability, earnings stability, and financial policy decisions.

The results reveal three main insights. First, environmental performance exhibits little association with accounting-based credit risk. Neither emissions nor resource efficiency significantly affect the Altman Z- score, while environmental innovation shows a negative relationship, possibly reflecting the short-term financial burden of innovation investments. Propensity score matching confirms that environmental performance does not significantly influence Z-scores, suggesting that traditional distress metrics capture limited environmental effects.

Second, credit ratings are more sensitive to environmental performance. Resource efficiency consistently correlates with stronger ratings, while environmental innovation also contributes positively in several specifications. In contrast, emissions scores show only weak or inconsistent effects. Subsample analysis focusing on French firms highlights how institutional homogeneity improves explanatory power and restores the expected influence of financial controls, emphasizing that cross-country heterogeneity may obscure underlying relationships.

Third, environmental performance shapes certain financing policies but has limited impact on short-term financial performance. Firms with stronger emissions management obtain more long-term debt, innovators appear to rely less on debt and more on cash buffers, and resource-efficient firms hold lower liquidity reserves. However, profitability and operating cash flows remain largely unaffected, indicating that environmental practices influence financing structures rather than immediate financial outcomes. Overall, the findings suggest that while environmental performance is not yet fully reflected in accounting- based measures of credit risk, it plays a meaningful role in shaping credit ratings and financing policies. The results support two hypotheses: (i) a timing hypothesis, whereby environmental innovation entails upfront costs but strengthens longer-term creditworthiness; and (ii) a heterogeneity hypothesis, whereby effects depend on institutional and sectoral contexts.