Corporate Environmental Responsibility, Environmental Policy Stringency and Debt Cost in Europe

ABSTRACT The financial implications of corporate environmental responsibility (CER) remain a subject of considerable debate, with empirical evidence often yielding mixed results. This ambiguity suggests that the relationship is contingent upon broader contextual factors, particularly the institutional environment. Grounded in a dual framework of stakeholder theory and institutional theory, this article investigates the joint effect of firm‐level CER and country‐level environmental policy stringency (EPS) on the cost of debt for European firms. Using a sample of 2025 listed firms from 18 European countries from 2017 to 2021, our analysis employs fixed effects, structural equation, and multilevel models. The findings reveal that higher CER significantly reduces a firm's cost of debt. More importantly, national environmental policy serves as a critical mechanism that both directly lowers debt costs and indirectly amplifies the financial benefits of CER by encouraging firms to improve their environmental performance. This research contributes by demonstrating the synergistic interplay between micro‐level corporate actions and macro‐level regulatory pressures, offering robust evidence that cohesive environmental strategies at both corporate and governmental levels yield tangible financial advantages.