57 Pages Posted: 11 Jun 2021 Last revised: 1 Jul 2021
Date Written: July 1, 2021
The "ESG lending" market, where loan contract terms are contingent on borrower ESG performance (i.e., ESG-linked loans), or where loans are issued for specific green projects (i.e., Green loans), has grown exponentially from $6 billion in 2016 to $173 billion in 2019. Much of this growth is driven by ESG-linked loans which are widespread across various industries and well developed capital markets, especially in civil law countries. ESG-linked loans are issued in sizeable amounts by large and publicly listed borrowers, and are often structured through revolving credit facilities by large groups of syndicates led by reputable "ESG specialist" global banks, who keep tight relationships with borrowers. Green loans are smaller project finance vehicles, similar in format to green bonds, yet issued to mostly privately held borrowers. They do not tend to attract large cross-border syndicates. We find that ESG loans tend to be written by borrowers and lenders with superior ESG profiles ex-ante, and find no evidence that their ESG performances deteriorate ex-post after ESG loan issuance. Overall, our results indicate that borrowers capable of maintaining high ESG standards and lenders capable of coordinating and monitoring ESG loan contracts drive the emergence of ESG banking activities around the globe.
Keywords: ESG, ESG Loans, ESG Lending, Sustainable Finance, Green Finance, Bank Lending
JEL Classification: G21, G32, M14
Suggested Citation: Suggested Citation