The green gift: Environmental credit rating policy and loan contract terms.

We explore the effect of China's unique environmental credit rating pilot policy on loan contract terms between firms and banks. First, we find that the environmental credit rating policy increases the amount of bank loans received by firms and lowers their borrowing costs. These results remain robust across a range of sensitivity tests. Second, the mechanism tests identify signal transmission and risk avoidance as two key factors facilitating the positive effects. Cross-sectional analyses find that the positive effects of environmental credit rating policy are more pronounced in contexts with non-state-owned firms, banks performing well in environmental responsibility, weak bank-firm relationships, and suboptimal business environments. Finally, the environmental credit rating policy also contributes to optimizing the loan structure and extending loan maturity.