ESG Risk and Syndicated Lending Relationship

Abstract

We investigate the impact of Environmental, Social, and Governance (ESG) scores on the matching process between borrowers and lenders, as well as on the resulting conditions of syndicated loans. Our findings suggest that companies with strong ESG credentials are more likely to obtain loans from banks that also have high ESG ratings. This lender-borrower dynamic is especially evident in politically liberal or "blue" states. Moreover, companies with elevated ESG ratings often receive favourable loan terms, such as reduced loan spreads and fewer financial covenants, especially when their lending institutions also possess high ESG scores or are situated in blue states. In summary, a company's ESG profile not only influences its loan conditions but also its choice of lending partner, and local political leanings also play a role in shaping this relationship.

Keywords: ESG risk, Syndicated lending, Cost of loans, Information asymmetry, Bank monitoring

JEL Classification: A13, G21, Q51, Q58