Does energy efficiency reduce the cost of debt? Evidence from the emerging market!

Energy efficiency is considered critical towards sustainability for all businesses, given that traditional energy intensification is not only an expenditure but also a proportional source of carbon emissions. However, it is unclear how investors consider a firm’s energy efficiency while deciding on its cost of debt. This study aims to analyse the relationship between firms’ energy efficiency and the cost of debt using panel data regression with a fixed effect on 17,175 firm-year observations of 2284 companies. The endogeneity effects of variables have been controlled using instrumental variables. The study found evidence that energy efficiency leads to a reduction in the cost of debt. This study also analyses the impact of energy efficiency on investments made in research and development. The findings suggest that efficient energy firms are technologically advanced through higher investments in research and development, effectively improving the firm’s values and helping to reduce their cost of debt. The results support that energy-efficient firms are technologically advanced and better positioned regarding firm value. Thus, they are regarded as secure funding with reduced costs of debts. This research demonstrates that lenders must be responsive to modern-day cultures’ social concerns through better social engagements in the context of global warming and climate change.