Environmental sectoral classification and ESG signals: Evidence on the cost of debt from the EU Taxonomy

This study examines how sector-level environmental classifications and firm-level ESG performance jointly influence firms’ financing conditions. While ESG scores capture the sustainability profile of individual firms, the EU Taxonomy provides a credible framework to classify the environmental sustainability of entire economic sectors. Using a sample of 770 European companies between 2007 and 2022, we document that companies operating in environmentally sustainable sectors according to the EU Taxonomy enjoy lower debt costs regardless of their individual environmental performance, proxied by ESG scores. Conversely, firms in the other sectors experience lower debt cost only when they achieve higher environmental scores. These findings highlight the complementary roles of sectoral classification and firm-level signals in influencing creditors’ assessment of environmental risk, and underscore the importance for firms in less sustainable sectors to credibly signal their environmental commitment to improve access to debt finance.