Do Scope 3 Carbon Emissions Impact Firms' Cost of Debt?

Abstract

Do firms that report more carbon emissions - particularly scope 3 emissions - face a higher cost of borrowing in credit markets? In this paper, we find that firms that disclose scope 3 emissions face a lower cost of borrowing in credit markets and estimate a scope 3 disclosure premium of -20 basis points on average. However, credit markets do not significantly discriminate the quantitative amount of reported scope 3 emissions while penalizing scope 1 + 2 carbon generation. Is this trend because markets reward advertised rather than actual pollution reduction efforts - greenwashing - or because scope 3 data is not yet mature enough to provide reliable information? While the literature has documented evidence of investors rewarding greenwashing, we find substantial discrepancies in firms' scope 3 disclosures across time, regions, and sectors. We show that these discrepancies are mainly concentrated in downstream data. Based on these findings, we highlight possible areas of engagement between firms and investors or policymakers that would be beneficial to all stakeholders.

Keywords: Credit, carbon emissions, scope 3

JEL Classification: G12, Q53, Q54