The fine print in bank loans is a hidden 'green killer' that forces companies to ditch their environmental plans.
Banks often include 'performance covenants' that require companies to meet short-term profit targets. Researchers found that managers under these pressures systematically slash sustainability spending first to avoid a technical default, meaning debt contracts are accidentally sabotaging the green transition.
Covenant Stringency, Lender Monitoring, and Corporate Environmental Spending
SSRN · 6459434
This study provides new evidence that the design of debt contracts can distort firms’ long-term environmental investment decisions. Using U.S. bank loan data from 2011 to 2023, we find that firms subject to stricter “performance covenants” tied to short-term operating metrics significantly reduce environmental expenditures. In contrast, “capital covenants” focused on leverage and capital structure do not impose comparable constraints on sustainability investments. The constraining effect of perf