Environmental performance and credit ratings: A transatlantic study

This paper investigates the impact of the firms’ environmental performance on their credit rating. To this end, we conduct a transatlantic study covering companies in the United States (US) and in the European Union (EU). Our study reveals that firms’ environmental improvements positively contribute to their credit ratings. However, this effect varies between the US and the EU. If US and European firms enhance their environmental performance by the same scale, the former’s creditworthiness benefits more than the latter’s. Additionally, we show that improvements in environmental performance affect credit ratings linearly in the US but nonlinearly in the EU. These findings shed light on the implications of the firms’ environmental performance and provide critical insights into the impact of corporate sustainability indicators on credit ratings. • We investigate the impact of environmental performance on credit ratings. • We perform a comparison of such effect in firms across the US and the EU. • Firms’ environmental improvements positively contribute to their credit ratings. • There is a linear relationship in the US and a nonlinear one in the EU. • We identify a transmission channel via the stringency of environmental policy.