Corporate ESG Profiles and Banking Relationships

Abstract

We show that banking relationships act as a transmission mechanism for promoting corporate Environmental, Social and Governance (ESG) policies. Specifically, banks are more likely to grant loans to borrowers with similar ESG profiles, and positively influence subsequent borrower ESG performance. This influence is more pronounced when 1) banks have significantly better ESG ratings than their borrowers, and 2) borrowers are bank-dependent. We exploit M&A among lenders as a source of quasi-exogenous variations in the lender’s ESG standard to alleviate concerns on endogeneity. Overall, our study presents the first empirical evidence on the interplay between responsible lending and borrower ESG behavior.

Keywords: ESG, banking, responsible lending, creditor control

JEL Classification: G21, G28, G38, Q50