The ESG Divide: How Banks and Bondholders Differ in Financing Brown Firms

Abstract

We examine how banks and public bondholders respond to borrowers' non-financial performance across debt markets and over time. After negative environmental, social, or governance events, public bondholders substantially reduce financing, while banks do not appear to reduce lending and sometimes increase loan amounts. Both lenders charge higher interest rates, but bank loans become relatively more attractive for brown borrowers: brown firms pay lower loan premiums relative to model-implied spreads than green firms. Our tests suggest that these differences reflect banks' superior information about the financial materiality of ESG risks and differences between banks' and bondholders' preferences for borrowers' non-financial performance.

Presented at: Central Bank Research Association*, China International Conference in Finance, Trans-Atlantic Doctoral Conference*, Alliance for Research on Corporate Sustainability UCLA Conference*, Northern Finance Association*, Peking University Guanghua

*denotes presentation by co-author

Mentioned by: Wharton ESG Initiative