When forecasting the prospects of sustainable firms, it is of course critical to understand their capital structure. Much of the intersection of sustainability and capital structure has focused on one question: does being green reduce a company’s cost of debt?
The answer is sometimes.
While the concept of the “greenium”—where green debt is priced slightly more favourably than conventional debt—has received considerable attention, the empirical evidence remains mixed. In some markets and products the pricing benefit is evident, while in others it is small or difficult to isolate from broader credit fundamentals.
For valuation professionals, however, this may not be the most interesting question.
The real financing advantage of sustainable businesses often extends well beyond a modest reduction in borrowing costs.
1. Lower financing costs
The most obvious potential benefit is a lower interest margin or coupon.
This is particularly visible in Sustainability-Linked Loans (SLLs), where achieving predefined sustainability KPIs results in a reduction in the loan margin. Here, the pricing benefit is contractually embedded.
For use-of-proceeds instruments, such as green loans or green bonds, the picture is less straightforward. Since these instruments are typically pari passu with conventional debt, any pricing advantage ultimately depends on how much investors value the green characteristics of the financing.
2. Better access to capital
Arguably more important than pricing is market access.
Companies able to issue credible green debt often have access to a broader universe of lenders and investors. Dedicated sustainable investment funds, green bond portfolios and ESG mandates create additional sources of liquidity that may simply not be available to comparable issuers without eligible assets or projects.
This advantage may become particularly valuable during periods of financial market volatility. When credit markets tighten, maintaining access to multiple pools of capital can prove valuable and at times critical for business survival.
3. Greater financing capacity
A third benefit is the possibility of increased financing flexibility.
In certain markets, sustainability characteristics can support higher lending capacity. A familiar example is green mortgages, where lenders may offer higher loan-to-value ratios or more favourable financing terms for energy-efficient properties or renovations that improve environmental performance.
The same principle can apply more broadly wherever sustainable assets exhibit stronger long-term resilience, lower operating risks or improved regulatory alignment.
What does this mean for valuation?
When forecasting sustainable businesses, financing assumptions can extend beyond the traditional weighted average cost of capital.
A robust valuation may also consider:
- potential reductions in financing costs;
- access to a wider investor and lender base;
- greater resilience during periods of market stress;
- increased debt capacity; and
- the resulting impact on growth opportunities and financial flexibility.
These effects will not apply equally across every sector or country. Nevertheless, they demonstrate that the value of sustainability may lie not only in marginal changes to the cost of capital, but also in improving the availability and flexibility of financing.
For many businesses, those advantages may ultimately prove to be worth far more than the greenium itself.