Does it pay to be environmentally responsible? Investigating the effect on the weighted average cost of capital

This research aims at investigating the effect of firms' environmental policies on the weighted average cost of capital (WACC) in order to catch capital markets' reaction towards corporate environmental commitment and effectiveness in reducing carbon emissions. We refer to the European market and analysed a sample of companies listed on the Stoxx Europe 600 Index during the timeframe 2014–2018. Our results show that capital markets have become particularly sensitive to environmental issues and therefore reward environmentally virtuous firms with a lower after tax WACC. We also argue that this effect is prominent for both high emitting and low emitting industries.