The Impact of Environmental, Social, and Governance Disclosures on Loan Contracts

This study examines the impact of firms’ environmental, social, and governance (ESG) disclosures on the pricing and nonpricing terms of banks’ debt contracts. Using ESG disclosure scores and bank debt contract data for S&P 1500 firms between 2009 and 2021, we find strong evidence that banks impose more covenants on firms with lower ESG disclosure scores, particularly those with higher informational uncertainty, and weaker evidence that banks charge higher interest rates. Banks include restrictions on excess cash flow sweeps, asset sales sweeps, and collateral requirement general covenants when ESG disclosures are low. ESG disclosures remain a significant determinant of covenants after controlling for ESG performance and accounting for simultaneity between pricing and nonpricing terms of debt contracts. ESG disclosures provide banks with incremental information on firms’ default risk beyond what is available from financial data. Our findings suggest that increasing ESG disclosures can yield favorable debt contract terms for firms. JEL Classifications: M14; G14; G21; G32.