Relative carbon performance and cost of debt: evidence from S&P500

Abstract

This study examines the relationship between carbon intensity and cost of debt for S&P 500 non-financial firms over the period 2015-2024. Using a panel of 2,917 firm-year observations from 402 unique firms, the analysis employs panel fixed-effects regressions controlling for firm-level financial characteristics to assess whether carbon intensity is significantly associated with corporate borrowing costs, and whether lenders differentiate debt pricing based on firms' relative carbon performance within sector-year peer groups. The results indicate that carbon intensity is negatively and significantly associated with the cost of debt, consistent with the lender myopia hypothesis whereby creditors prioritize short-term financial metrics over long-term carbon transition risks. This negative relationship is concentrated among non-carbon-intensive firms and is absent in carbon-intensive sectors, where lenders appear to treat elevated emissions as an inherent industry characteristic rather than a firm-specific risk signal. No evidence is found that above-median polluters face a steeper marginal pricing penalty than lower-emitting peers within the same sector-year group, suggesting that U.S. large-capitalization lenders do not engage in within-sector carbon benchmarking. Firm characteristic analysis further reveals that carbon risk pricing is most pronounced among value firms and high-profit firms, identifying asset intensity and profitability as key firm characteristics associated with stronger carbon risk pricing. These findings contribute to the sustainable finance literature by documenting that U.S. large-capitalization debt markets do not yet systematically penalize carbon-intensive borrowers, and that mandatory carbon disclosure requirements may be necessary to enable more systematic carbon risk pricing in debt markets.