Corporate ESG Profiles, Matching, and the Cost of Bank Loans

Abstract

I examine the impact of corporate Environmental, Social, and Governance (ESG) profiles on the formation of lending relationships between firms and banks, and the implications of this matching for loan pricing. I find that high ESG firms are more likely to receive a bank loan, and their loans come with lower interest rates. These effects, however, are driven by banks previously linked to a group of borrowers with low sustainability performance. These findings suggest that low ESG banks have a stronger incentive to improve their ESG profile by linking themselves to high ESG-rated firms, and thus they are willing to provide a loan with a lower spread. I support these findings using the FTSE4Good US Index rebalance events as shocks to borrowers' ESG reputation. Lastly, I find that borrowers attempt to improve their ESG while seeking a loan, and then once they get it, they reduce that effort.