63 Pages Posted: 11 Jun 2021 Last revised: 14 Dec 2021
Date Written: December 13, 2021
"ESG lending" has grown from $6 billion in 2016 to $322 billion in 2021, driven by ESG-linked loans where loan contract terms are contingent on borrower ESG performance. These loans are widespread across industries and mostly issued by large and publicly listed firms in well-developed capital markets. ESG-linked loans are often structured through revolving credit facilities by large groups of syndicates led by dominant global banks who keep tight relationships with borrowers. Green loans are smaller non-relationship project finance vehicles issued for specific green projects, similar in format to green bonds, mostly to privately held borrowers. ESG loan borrowers generally enjoy a net pricing advantage. However, ESG-linked loans are opaque and vary widely in the extent of their contractual disclosures. Although ESG loans are written by borrowers and lenders with superior ESG profiles ex-ante, we find no evidence that their ESG performances improve post issuance. Stock market reactions to ESG loan announcements reflect investor vigilance against potential greenwashing. Overall, our results indicate that ESG banking activities around the globe have emerged largely out of preexisting lending relationships, exhibit low transparency, and have little positive impact on the status quo of corporate ESG performance.
Keywords: ESG, ESG Loans, ESG Lending, Sustainable Finance, Green Finance, Bank Lending
JEL Classification: G21, G32, M14
Suggested Citation: Suggested Citation