Do Environmental Concerns Affect the Cost of Bank Loans ? ∗

I study whether a firm’s environmental profile affects the cost of its bank loans. I find that firms with environmental concerns such as hazardous waste concern, substantial toxic chemical emission concern and climate change concern pay a higher interest rate on their bank loans. Firms that derive substantial revenue from environmentally beneficial products pay a lower interest rate on their bank loans but membership in voluntary environmental initiatives such as CERES doesn’t have a significant impact on the price of bank loans. Further, I provide evidence that the environmental concerns and strengths of the firm are not simply proxying for an omitted component of firm’s default risk. These results suggest that environmentally sensitive lending has a potential to impact the environmental policies of the firm through the cost of capital channel. ...Faced with mounting pressure from protest groups, ten of the world’s leading banks have agreed to adhere to international environmental and social-impact standards when financing dams, power plants, pipelines and other infrastructure projects... (Wall Street Journal, June 4, 2003) ...Citigroup Inc., JPMorgan Chase & Co. and Morgan Stanley say they’ve produced The Carbon Principles together with several large power companies, Environmental Defense and the Natural Resources Defense Council, that will make it more difficult for new U.S. coal-fired power plants to secure financing. The focus of the principles will be to steer power companies away from plants that emit high levels of carbon dioxide (a greenhouse gas) and to focus on new, cleaner and renewable technologies. ... (Associated Press, Feb 4, 2008).