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.

Regulatory concerns of biodiversity conservation prompt creditors to markdown firms surrounded by rich wildlife species: Combining a proximity-based biological diversity endowment (BDE) measure with an exogenous shock to regulatory enforcement, we show that high-BDE firms experience a sharp rise in bond spreads and suffer with less bond (re-)issuance after the shock. Geospatial and thermal evidence indicates that high- BDE firms experience more post-event curbs on business operations. They also experience a larger deterioration in firm fundamentals, confirming the transition risk channel. Finally, high-BDE firms’ transition cost is magnified by local regulatory intensity, but is not mitigated by their prior ESG performance.

Renewable energy is essential for mitigating climate change but can harm biodiversity through habitat loss. We combine spatial biodiversity data, satellite imagery, and asset-level information on 47,616 hydro, solar, and wind plants to construct a measure of their biodiversity impacts. Solar plants have high aggregate impacts due to land use, while hydro plants are often sited in biodiversity-sensitive areas. Impacts are highly concentrated, skewed, and vary across plants by owner type (listed versus unlisted, financial versus non-financial) and financing structure (project versus corporate finance). Counterfactual analyses show that nearby siting alternatives could reduce impacts substantially without foregoing renewable energy investment.