This paper examines whether a firm’s exposure to deforestation risk affects loan terms. We find that forest-dependent firms face higher loan spreads than their peers when forest loss is driven by wildfires. In contrast, when forest loss is human-induced, the gap in spreads becomes significant only after the European Commission proposed the deforestation regulatory framework. Firms obtaining loans in the aftermath of human-induced deforestation subsequently reduce their reliance on forest-based inputs from suppliers in high-risk countries, initiate reforestation efforts, and divest from pollutive deforested plants. Our findings highlight banks’ compliance role in green transition.
