Transmission Effects of ESG Disclosure Regulations through Bank Lending Networks

This paper studies whether and how ESG disclosure regulations imposed on banks generate transmission effects along the lending channel. I use a setting of U.S. firms borrowing from non-U.S. banks and exploit the staggered adoption of ESG disclosure regulations in banks’ home countries. I find that exposed borrowers of affected banks improve their environmental and social (E&S) performance following the disclosure mandate. Consistent with banks enhancing both their engagement and selection activities, affected banks impose more environmental action covenants in loan contracts and they are more likely to terminate a borrower with bad E&S records following the regulation. Further evidence shows that the transmission effect is stronger when a disclosure regulation is well enforced by inducing a greater increase in the amount of new and quantitative information provided by banks, and when the lending relationship is more important for a borrowing firm. Collectively, this study documents the role of lending relationships in transmitting the real effect of ESG disclosure regulations from banks to borrowing firms