Climate-related Disclosure Commitment of the Lenders, Credit Rationing, and Borrower Environmental Performance

Using a borrower firm’s relationship bank becoming a member of the Task Force on Climate-Related Financial Disclosures (TCFD) and thus committing to more transparent climate-related disclosures as a plausible exogeneous shock, we examine whether and how lenders’ commitment to climate-related disclosure affects borrower firms’ environmental performance. We find that treated firms, relative to control firms, have significantly better environmental performance after the launch of the TCFD: lower EPA enforcement likelihood, lower levels of toxic releases, and better environmental scores. The effects are significantly stronger for polluting firms. Moreover, we find that TCFD member banks influence their borrowers’ environmental performance via charging higher loan spread and reducing the number and amount of new loans issued to polluting firms. Finally, after the launch of the TCFD, polluting clients of TCFD member banks experience significantly tightened financial constraints relative to polluting borrowers of non-TCFD banks. Taken together, our findings suggest that lenders’ commitment to more transparent climate-related disclosures does generate the intended benefits by encouraging green financing and improving the environmental performance of the non-financial sector