The Economic Consequences of Firms’ Commitment to ESG Policies

Event Date: 16 March 2023 - 22 March 2023

Speaker: Professor Dan Amira, Tel Aviv University

Time: 2pm


The largest U.S. banks have adopted, in a staggered manner, an environmental and social risk management framework called the Equator Principles (hereafter the EP). Utilizing this staggered adoption, we reveal a significant reduction in loan spreads for firms borrowing from banks that have adopted the EP framework (hereafter EP lenders). Such a reduction is stronger among borrowers who actively switch to EP lenders. Moreover, we document a significant increase in the overall intensity of environmental covenants as a specific commitment mechanism for firms borrowing from EP lenders. The effect of the EP also varies with different types of environmental covenants. In addition, we find an increase in early loan terminations after borrowers take loans with environmental covenants from EP lenders. After firms borrow from EP lenders, their cost of equity also declines. Finally, we find an improvement in the environmental performance of these borrowers. Taken together, our findings are consistent with firms reducing their cost of capital by committing to environmental protection through loan contracts.

Published: 16 March 2023

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