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.