Does Higher Company Environmental Score Bring Economic Benefit Across Credit Ratings? Evidence from European A3, Baa1 and Baa2 Corporate Bonds

This thesis examines whether firm-level environmental performance is priced in corporate bond markets and whether its effect varies across investment-grade credit rating categories. Using a cross-sectional dataset of 893 European corporate bonds from LSEG Data & Analytics, the relationship between environmental performance and option-adjusted yield spreads is analysed. The empirical results reveal a statistically significant negative relationship, indicating that firms with stronger environmental performance tend to benefit from lower borrowing costs. This effect is observed across all model specifications and rating categories, although its magnitude varies and does not follow a strictly monotonic pattern. In addition, environmental performance provides incremental explanatory power beyond traditional determinants of bond pricing such as credit risk, maturity, and liquidity. Overall, the findings suggest that environmental performance represents a relevant but complementary factor in corporate bond valuation. The results provide evidence that environmental risk is increasingly incorporated into fixed-income markets and highlight the growing importance of sustainability considerations for both investors and corporate issuers.