7. Corporate Environmental Performance and Bond Ratings: European Evidence

The environmental dimension of corporate social responsibility (CSR) has been considered as the most significant feature of CSR since it has implications for the wellbeing of society and the sustainability of national economies. Corporate environmental performance (CEP) is one specific aspect of firms’ investment that is being closely monitored by stakeholders and investors and has been a prominent determinant of firms’ financial performance and creditworthiness. Nevertheless, CEP is a multi-dimensional issue, a fact that has not been considered extensively by the literature. The scope of this chapter is to examine the impact of corporate environmental performance (capturing three dimensions namely emission reduction, environmental innovation, and resource use efficiency) on firms’ creditworthiness, measured through bonds credit ratings. The chapter quantitatively analyzes a sample of 3329 unique listed firms originating from 24 EU countries, over the period 2003–2020. Empirical evidence documented a positive association of enhanced CEP performance on the ratings of bonds. The results remain robust after a series of sensitivity tests. Finally, useful policy implications for investors and managers are derived from this research.