Does ESG performance impact credit portfolios? Evidence from lending to mineral resource firms in emerging markets

Abstract

Mineral resource firms have significant economic contributions in emerging markets with sizeable resource rents. However, the environmental impact of their business operations is a valid and pressing concern, particularly for the banking sector, which both finances these companies and endeavors to champion sustainable intermediation practices. The academic evidence on this topic is limited and therefore, in this study, we assess the performance of credit portfolios of banks with exposure to mineral-related companies. Using a sample of banks from twenty-four countries over ten years, our findings indicate that banking spreads are positively related to the proportion of lending to the resource firms and their ESG scores. Similarly, we observe an improvement in asset quality for banks with greater exposure to mineral-related companies having higher ESG and lower emissions. These results imply that financial intermediaries can enhance their performance by concentrating on mineral resource firms that have adequate ESG and emissions ratings. The findings have important implications for promoting sustainable lending across mineral-related businesses.