ESG Lending

68 Pages Posted: 11 Jun 2021 Last revised: 28 Mar 2022

See all articles by Sehoon Kim

Sehoon Kim

University of Florida - Department of Finance, Insurance and Real Estate

Nitish Kumar

University of Florida

Jongsub Lee

Seoul National University; University of Florida - Warrington College of Business Administration

Junho Oh

Hong Kong Polytechnic University - School of Accounting and Finance

Date Written: March 8, 2022

Abstract

This paper examines the environmental, social, and governance (ESG) loan market, which has grown from $6 billion in 2016 to $322 billion in 2021. This growth is driven primarily by ESG-linked loans where loan spreads are contingent on borrower ESG performance, as well as by use-of-proceeds based green loans issued for specific green projects. ESG-linked loans are mostly issued by large and publicly traded firms with superior ESG profiles. These loans are often structured as revolving credit facilities and syndicated by dominant global banks with good ESG profiles and pre-existing lending relationships with borrowers. Green loans, on the other hand, are mostly issued to privately held borrowers by non-relationship lenders. ESG loan borrowers enjoy a net pricing advantage, suggesting improved ESG profiles reduce credit risk or that lenders value being associated with ESG loans. We find that ESG-linked loans are opaque and vary widely in the extent of their contractual disclosures. Consistent with greenwashing, borrowers with low quality disclosures about ESG contract features experience deterioration in ESG scores after loan issuance. Borrowers with high quality disclosures continue to maintain good ESG profiles and stock markets react positively to such loan announcements. Overall, our results indicate market vigilance against potential greenwashing and suggest that as the market matures, the ESG loan market has potential to make a positive impact on corporate ESG performance.

Keywords: ESG, ESG Loans, ESG Lending, Sustainable Finance, Green Finance, Bank Lending

JEL Classification: G21, G32, M14

Suggested Citation

Kim, Sehoon and Kumar, Nitish and Lee, Jongsub and Oh, Junho, ESG Lending (March 8, 2022). Proceedings of Paris December 2021 Finance Meeting EUROFIDAI - ESSEC, European Corporate Governance Institute – Finance Working Paper No. 817/2022, Available at SSRN: https://ssrn.com/abstract=3865147 or http://dx.doi.org/10.2139/ssrn.3865147

Sehoon Kim (Contact Author)

University of Florida - Department of Finance, Insurance and Real Estate ( email )

P.O. Box 117168
Gainesville, FL 32611
United States

Nitish Kumar

University of Florida ( email )

Gainesville, FL 32611
United States

Jongsub Lee

Seoul National University ( email )

Kwanak-gu
Seoul, 151-742
Korea, Republic of (South Korea)

University of Florida - Warrington College of Business Administration ( email )

Department of Finance Insurance & Real Estate
P.O. Box 117168
Gainesville, FL 32611-7168
United States
352-273-4966 (Phone)
352-392-0301 (Fax)

Junho Oh

Hong Kong Polytechnic University - School of Accounting and Finance

Hung Hom
Kowloon
Hong Kong

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
1,402
Abstract Views
4,376
rank
19,077
PlumX Metrics