The EU Non-Financial Reporting Directive and Loan Costs: Insights from Syndicated Loans

We investigate how the introduction of a large-scale sustainability reporting mandate affects companies’ cost of loans by analyzing data on global syndicated loan deals over the period 2010–2019. In October 2014, the European Union (EU) passed the Non-Financial Reporting Directive (NFRD 2014/95/EU), which requires large public companies and credit institutions to disclose sustainability information. We start our analysis by documenting that loan costs are, on average, negatively related to borrowers’ sustainability performance. In our main analysis, we document that loan costs significantly decrease among borrowers within the scope of the Directive compared to a control group of borrowers from the United States (US) and Switzerland. This decrease is concentrated in companies with better sustainability performance. This result holds for alternative sustainability performance variables. In a further analysis, we split the sample based on the location of the lead lenders. We show that the decrease in loan costs among EU-based borrowers with superior sustainability performance is stronger if the majority of lead lenders are also located in the EU and thus also subject to the NFRD. Overall, our study provides evidence that borrowers that exhibit superior sustainability performance profit from a sustainability reporting mandate through reductions in their loan costs.