Abstract
As a result of recurring natural disasters caused by climate change, firms are under enormous pressure to reconsider their environmental footprints. However, whether or not investors reward firms' climate change actions remains a topic of considerable debate. Using a sample of S&P 500 companies over the period 2005–2020, we hypothesise and find a significant negative relationship between climate change actions and the cost of debt, indicating that investors indeed reward corporate climate efforts in the form of lower cost funds. This relationship exists in both environmentally sensitive and non‐sensitive industries and remains negative and statistically significant even after controlling for the impact of the ongoing pandemic (COVID‐19). The findings are robust to the use of alternative measures for our variables, alternative estimation methods and after controlling for endogeneity issues. We interpret our findings within the decision‐usefulness and stakeholder‐agency theories that suggest that non‐financial information on firms' environmental performance is becoming increasingly important when borrowers' creditworthiness is assessed. Our study offers important regulatory and academic policy implications.