Plants vs. zombies

: the hidden environmental costs of credit misallocation

Abstract

This paper examines the effect of zombie firms on corporate environmental performance and the broader sustainability transition in Europe. Using a panel dataset of publicly listed firms across 18 countries and 33 sectors from 2005 to 2024, I assess how zombie status and sector-level zombie prevalence influence both disclosure-based environmental scores (E-Scores) and emissions-based Scope 1 performance. I document three main findings. First, zombie firms significantly underperform on both E-Scores and Scope 1 emissions, consistent with financial distress constraining firms’ ability or willingness to invest in environmental performance. Second, this underperformance is conditional on sectoral environmental pressure: zombie firms in environmentally sensitive sectors exhibit significantly higher E-Scores than those in less scrutinized sectors, but do not show corresponding improvements in emissions. This suggests that compliance may be more symbolic than substantive. Third, a higher share of zombie firms within a sector is associated with lower E-Scores among non-zombie peers, indicating that zombie prevalence weakens environmental engagement at the sector level. These spillover effects are weaker in emissions outcomes, implying that reputational disengagement precedes operational decline. Collectively, the findings suggest that zombie credit not only undermines firm-level sustainability but also distorts sector-wide environmental incentives – highlighting the broader structural risks associated with the prolonged survival of non-viable firms.

Date of Award	25 Jun 2025
Original language	English
Awarding Institution	Universidade Católica Portuguesa
Supervisor	Eva Schliephake (Supervisor)