Does sustainability matter in the credit ratings of public real estate companies?

Research on ESG and real estate suggests that the industry can contribute to mitigating climate change by improving the “sustainability” of their property portfolio while also gaining better financial performance. However, the challenges of sustainable property investments (SPI) still exist due to the diffused causal chain between the high initial costs of investment and the resultant benefits in the long run. The aim of this study is to identify and model the impacts of SPI on the credit rating of Real Estate Investment Trusts (REITs), providing insight into the motivating factors that influence investors’ decisions to invest in properties with sustainability characters. The study was based on the panel data of 84 US equity REITs over 2014–2021. The regression analysis demonstrates a significant positive correlation between the sustainability of REITs’ property portfolio and their credit ratings, and that the advantages of SPI overshadow saving operational expenditures alone. The sub-period analysis also indicates that the marginal benefits of SPI may diminish over time, which, however, needs the support of further research. For robustness check, the type-year average of portfolio sustainability is used as an instrument variable in a two-stage model, and the results support previous findings. In short, this study supports the outlook that ESG-related investments are crucial parts of rating agencies’ assessment of REITs’ creditworthiness, and can enhance corporate financial performance through lowering firms’ debt financing costs.