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

Abstract

We study credit providers and costs of debt for firms with low ESG performance. First, we find that, while both banks and bondholders charge low-ESG borrowers a higher interest rate compared to high-ESG borrowers, the premium charged by banks is relatively lower. Second, while bondholders reduce the amount of financing when borrowers' ESG performance deteriorates, banks keep the size of their loans unchanged or even increase loans issued to low-ESG borrowers. We provide evidence that the difference in creditors' policies is driven by banks' superior information about how material borrowers' low ESG performance is and by lenders' different preferences regarding their borrowers' ESG 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 (scheduled)

*denotes presentation by co-author

Mentioned by: Wharton ESG Initiative