Corporate ESG Profiles, Matching, and the Cost of Bank Loans

Abstract

I examine the impact of corporate Environmental, Social, and Governance (ESG) on the matching between lenders and borrowers and loan pricing. High ESG firms are more likely to obtain loans, which come with lower interest rates. These effects are driven by low ESG banks that attempt to improve their ESG by lending to high ESG firms at lower rates. I support these findings using the FTSE4Good US Index rebalance events as shocks to borrowers’ ESG reputation. Lastly, I find that borrowers improve their ESG ratings while seeking a loan and reduce that effort after obtaining it.

Keywords: ESG, Matching, Loan Spread, Community Reinvestment Act (CRA)

JEL Classification: G21, G41, M14