The Unintended Consequences of Mandatory ESG Disclosure: Evidence from Global Loan Markets

TY - CONF

T1 - The Unintended Consequences of Mandatory ESG Disclosure

T2 - 14th International Conference of the Financial Engineering and Banking Society

AU - Luo, Yun

AU - Luo, Di

AU - Wu, Qiang

AU - Zeng, Cheng (Colin)

N1 - Conference code: 14

PY - 2025/7/24

Y1 - 2025/7/24

N2 - Although many countries have implemented environmental, social, and governance (ESG) disclosure regulations, the impact of these mandatory regulations on debt market remains widely debated. Using a difference-indifferences design and analyzing a large dataset of global bank loans from 2000 to 2019, we find that companies experience increased loan spreads following the implementation of mandatory ESG disclosure requirements. Channel tests reveal that this effect is primarily driven by increased ESG disagreement among rating agencies, greater environmental expenditures, and elevated litigation risks. Cross-sectional analyses further suggest that the influence of these regulations on loan spreads is more pronounced for firms with higher information opacity, greater financial constraints, and those operating in countries with weaker legal enforcement. Overall, our findings suggest that increased ESG transparency, though well-intentioned, may inadvertently lead to higher borrowing costs for firms.

AB - Although many countries have implemented environmental, social, and governance (ESG) disclosure regulations, the impact of these mandatory regulations on debt market remains widely debated. Using a difference-indifferences design and analyzing a large dataset of global bank loans from 2000 to 2019, we find that companies experience increased loan spreads following the implementation of mandatory ESG disclosure requirements. Channel tests reveal that this effect is primarily driven by increased ESG disagreement among rating agencies, greater environmental expenditures, and elevated litigation risks. Cross-sectional analyses further suggest that the influence of these regulations on loan spreads is more pronounced for firms with higher information opacity, greater financial constraints, and those operating in countries with weaker legal enforcement. Overall, our findings suggest that increased ESG transparency, though well-intentioned, may inadvertently lead to higher borrowing costs for firms.

KW - Mandatory ESG disclosure

KW - bank loans

KW - ESG disagreement

UR - https://www.febsociety.org/conferences/international-conferences/14th-international-conference/overview/

U2 - 10.2139/ssrn.5355596

DO - 10.2139/ssrn.5355596

M3 - Paper

Y2 - 11 June 2025 through 13 June 2025

ER -