How do banks contribute to the green economy? Using a unique dataset detailing firms' revenue exposure to green business activities, we present new evidence that firms generating revenue from green products and services are associated with lower syndicated loan spreads. We find that the green revenue effects on loan spreads are attributable to firms' prospects tied to climate change-related opportunities and banks' environmental orientation. Foreign banks subject to mandatory environmental, social, and governance (ESG) disclosure regulations reduce the loan spreads to green revenue firms. We also find suggestive evidence that firms with green revenue tend to file more green patents following loan origination. While banks typically perceive green innovation as riskier and demand higher loan spreads, this effect is offset if a firm also generates green revenue. Collectively, our results highlight the pivotal role that banks play in channeling financial resources toward green business practices.

We find that in the leveraged loan sector, firms borrowing from non-banks have lower profitability following loan originations, compared to firms borrowing from banks, after controlling for observable factors. As non-bank borrowers experience less intense monitoring than bank borrowers, they engage in more risk-taking, which could explain their lower profitability following loan issuance. Using the leveraged lending guidance as a plausibly exogenous shock, which resulted in the migration of borrowers from banks to non-banks, we provide causal evidence corroborating our main results. Overall, our findings suggest that macroprudential policies which exclusively target the traditional banking sector may have negative consequences.