were previously circulated, “Environmentally Responsible Lending ” and “Socially Re- sponsible Investing and Expected Stock Returns”. I would like to thank Matt Billett,

and 2011 Spring Q Group Conference for helpful comments and suggestions. I analyze the impact of a firm’s environmental profile on its cost of equity and debt capital. Using implied cost of capital derived from analysts ’ earnings es-timates, I find that investors demand significantly higher expected returns on stocks excluded by environmental screens (such as hazardous chemical, substantial emissions and climate change concerns) compared to firms with-out such environmental concerns. Lenders also charge a significantly higher interest rate on the bank loans issued to firms with these environmental con-cerns. I provide evidence that environmental profile of a firm is not simply proxying for an omitted component of its default risk. Further, firms with these environmental concerns have lower institutional ownership and fewer banks participate in their loan syndicate than firms without such environ-mental concerns. These results suggest that exclusionary socially responsible investing and environmentally sensitive lending and the consequent increase in the cost of equity and debt capital has the potential to prompt firms to internalize their environmental externalities. I