ESG Disclosure, REIT Debt Financing and Firm Value

Abstract

Using recently available GRESB ESG public disclosure data for REITs around the world, we examine how ESG disclosure is related to REIT debt financing and firm value. We find that REITs with higher levels of ESG disclosure have lower cost of debt, higher credit ratings, and higher unsecured debt to total debt ratio, controlling for key firm characteristics. These findings suggest that improving ESG disclosure can help REITs to gain better access to the capital markets and enhance corporate financial flexibility, as lenders have paid close attention to a firm’s ESG disclosure and integrated evaluation of ESG factors into their lending decisions. Moreover, firm value of REITs is positively associated with their ESG disclosure level. When using the Covid-19 pandemic as a quasi-experimental setting, we find evidence that REITs with higher ESG disclosure levels before the pandemic exhibit higher firm value during the pandemic. These results indicate that investors do value active ESG disclosure by REITs. Additional analyses show that ESG disclosure level is sensitive to institutional ownership, implying that institutional investors may drive REIT ESG disclosure efforts. Taken together, this paper suggests that effective ESG disclosure can have a positive impact on REIT debt financing and firm value due to the increased corporate transparency, and the ESG reporting framework developed by GRESB appears to be effective to provide transparency and comparability across the global real estate industry.

Keywords: ESG Disclosure, Debt Financing, Financial Flexibility, Firm Value, REIT

JEL Classification: G11, J24, R33