Biodiversity controversies and loan contracting

We examine how banks adjust loan contract terms in response to firm-level biodiversity-related controversies. Using incident-level data from RepRisk and a staggered difference-in-differences framework, we find that implicated firms face higher loan spreads, tighter covenants, and increased collateral requirements. The spread effect remains robust across heterogeneity-robust staggered difference-in-differences estimators and after controlling for climate-related and other environmental incidents. The effect is stronger for severe, widely covered, and credible incidents, for loans issued by larger lenders, in less competitive lending markets, and in high biodiversity-exposure industries, but weaker when prior lending relationships exist. We further find no deterioration in firms’ post-incident accounting- or market-based performance, consistent with a reputational risk interpretation. Our findings highlight the growing relevance of biodiversity risk in credit markets and the need for forward-looking frameworks to integrate the biodiversity component of nature-related risks into lending decisions.