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Environmental Performance and the Cost of Capital: Evidence from Commercial Mortgages and REIT Bonds

Piet Eichholtz, Rogier Holtermans, Nils Kok, Erkan Yonder
The increasing societal focus on environmental issues has led to differentiated corporate action as a response. This paper studies the impact of corporate environmental performance on cost of capital, using Real Estate Investment Trusts (REITs) as a laboratory. We document that loans on environmentally certified buildings command 25-31 basis point lower spreads. At the corporate level, REITs with a higher fraction of environmentally certified buildings issue bonds at lower spreads, an analysis of bond spreads in the secondary market corroborates this finding. The results provide evidence on the efficiency of the capital market in pricing risk-affecting environmental characteristics.