3.5 Cost of capital
According to Lanoie, & al. (2007) the capital lies at the
heart of any business. The funds needed to finance a new firm, its growth or
simply the continuation of its activities does not get easily and can be
costly. A company that maintains a positive environmental image may see its
task simplified in three distinct ways: access to green funds, the loan
facility from banks and improved performance in stock markets. Firstly, some
researchers in finance believe that the growing number of green (or ethical)
mutual funds had the effect of increasing the total funds available to
businesses that meet certain environmental criteria. In particular, investments
in U.S. funds subject to control socially rose by 258% between 1995 and 2005.
This exceeds the growth rate of other funds administered by professionals. In
France, the increase recorded was 92% between 2002 and 2006. Canada has also
increased sharply, investments from 65.5 to 500 billion dollars between 2004
and 2006. In 2005, about
10 dollars administered by professionals in the U.S., nearly $
1 (or 9.4%) was invested in a socially responsible fund. This percentage was
between 10 and 15% in Europe. In short, environmentally friendly companies have
access to a growing source of capital which reduces their cost of capital
compared to other similar firms. Secondly, companies that improve their
environmental performance can more easily get financed from banks. Given that
most of the major banks have now teams of experts in assessing the
environmental performance of potential borrowers and especially the potential
magnitude of responsibilities associated with contaminated resources. In
addition, some 40 international banks have adopted the "Equator Principles" in
order to ensure that the projects they fund are held in respect of the
environment, and 17 demonstrate appropriate practices of environmental
management. Thirdly, the shareholders in general may be influenced by
information related to the environmental performance of companies and their
reactions can be felt on the stock market. These movements can, in turn, affect
the cost of capital. Many empirical studies have attempted to identify the
stock market reaction to news about environmental performance. The literature
brings out three dominant approaches: a) portfolio analysis, b) the event
studies and c) the long-term studies using the regression analysis. The vast
majority of these studies indicate that better environmental performance is
associated with better stock market performance (at least, it is not worse).
Rising stock prices relative to the rest of the market may in turn reduce the
cost of capital. Companies listed on the Stock Exchange are more likely to
benefit from lower capital cost as a result of improved environmental
performance. In short, the following hypothesis will be examined
H5: By having access to cheaper capital, green innovative
firms increase their return on sale compared to other firms, ceteris
paribus.
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