The Economic Consequences of Firms’ Commitment to ESG Policies

The largest U.S. banks have adopted, in a staggered manner, an environmental and social risk management framework. Based on a large sample of borrowers, utilizing a staggered difference-in-differences design, we document a significant increase in environmental protection provisions in the loan contract for borrowers that borrow from banks that adopted the framework. Moreover, we reveal a significant reduction in loan spreads, especially among borrowers who borrow from early EP adopters and borrowers who actively switch to banks that adopted the framework. Additionally, the cost of equity decreases for borrowers from banks that adopted the framework. Lastly, we document an increase in environmental performance for these borrowers after the contract. Taken together, our findings are consistent with firms being able to reduce their cost of capital by opting to commit to environmental protection through loan contracts.