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

34 Pages Posted: 17 Oct 2022

See all articles by Ahyan Panjwani

Ahyan Panjwani

Board of Governors of the Federal Reserve System

Lionel Melin

MacroLucid Research

Benoit Mercereau

Arvella Investments

Date Written: August 31, 2022

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

Suggested Citation

Panjwani, Ahyan and Melin, Lionel and Mercereau, Benoit, Do Scope 3 Carbon Emissions Impact Firms' Cost of Debt? (August 31, 2022). Available at SSRN: https://ssrn.com/abstract=4205875 or http://dx.doi.org/10.2139/ssrn.4205875

Ahyan Panjwani (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Lionel Melin

MacroLucid Research ( email )

Paris
France

Benoit Mercereau

Arvella Investments

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