Greenhouse Gas Emissions and Cost of Debt: Evidence From European Firms Under Mandatory and Voluntary Disclosure

ABSTRACT Considering the growing attention to sustainability and the increasing regulatory pressure in the European landscape, this study evaluates whether greenhouse gas emissions affect firms' cost of debt. A panel regression was conducted from 2021 to 2024 on two samples of European firms. The first sample includes firms involved in the Non‐Financial Reporting Directive, while the second contains firms excluded from the directive's scope. The results show a positive relationship between emissions and the cost of debt within European firms not subject to regulation, highlighting a robust relationship among smaller companies where emissions are a key concern. For larger firms subject to the directive, the cost of debt is not influenced by emissions. Still, it is closely linked to broader environmental performance, such as energy efficiency and biodiversity. The findings highlight that proactive sustainability strategies, particularly strong environmental performance, can lower firms' cost of debt and enhance their competitive position.