This paper investigates the determinants and real economic effects of environmental covenants in supply chain contracts, as well as their interaction with public regulatory enforcement. We show that the likelihood of including environmental covenants is positively associated with the expected benefits of managing suppliers' pollution risks and aligning with shareholder preferences for sustainability, and negatively associated with the anticipated costs of monitoring and enforcing compliance. In settings such as high-polluting industries, where both benefits and costs are elevated, whether covenants are adopted ultimately depends on which effect dominates. Using identification strategies based on the close victory of the Democratic Party in elections, we find that stronger public regulatory enforcement reduces the likelihood of covenant adoption, indicating that contractual monitoring and public oversight function as substitutes. Finally, we provide evidence that environmental covenants causally generate tangible improvements in supply chain sustainability, as disciplined suppliers significantly reduce toxic emissions and increase their hiring of environmental specialists.