Climate Reputation and Bank Loan Contracting

Karel Hrazdil (), Deniz Anginer (), Jiyuan Li () and Ray Zhang ()
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Karel Hrazdil: Simon Fraser University
Deniz Anginer: Simon Fraser University
Jiyuan Li: Chongqing University of Technology
Ray Zhang: Simon Fraser University

Journal of Business Ethics, 2024, vol. 192, issue 4, No 11, 875-896

Abstract: Abstract We investigate how negative news coverage of borrower’s impacts on climate change affects bank loan contracting. Using a sample of publicly traded US firms for the period 2000–2016, we show that loans initiated following negative news coverage about firm’s adverse climate-related incidents have significantly higher spreads, shorter maturities, more covenant restrictions, and a higher likelihood of collateral security requirements. We find no changes in client firm’s credit fundamentals after such incidents, indicating that lender’s reputational concerns rather than the longer-term environmental impacts of their borrower’s actions are the primary drivers of these changes. This observation highlights the need for increased scrutiny of banks’ lending practices to ensure that they are genuinely committed to sustainability rather than merely engaging in symbolic actions.

Keywords: Bank loan pricing; Climate finance; Climate reputation risk; Adverse climate-related incidents; Environmental; social; and governance (ESG) incidents; Cost of capital (search for similar items in EconPapers)
JEL-codes: G21 G22 K22 K42 Q54 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s10551-023-05517-7

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