The ESG Divide: How Banks and Bondholders Differ in Financing Brown Firms

63 Pages Posted: 20 Oct 2022 Last revised: 10 Dec 2024

See all articles by Irina Luneva

Irina Luneva

New York University (NYU) - Leonard N. Stern School of Business

Sergey Sarkisyan

Ohio State University (OSU) - Department of Finance

Date Written: August 29, 2024

Abstract

We study credit providers and costs of debt for firms with low ESG performance.  First, we find that, while both banks and bondholders charge low-ESG borrowers a higher interest rate compared to high-ESG borrowers, the premium charged by banks is relatively lower. Second, while bondholders reduce the amount of financing when borrowers' ESG performance deteriorates, banks keep the size of their loans unchanged or even increase loans issued to low-ESG borrowers. We provide evidence that the difference in creditors' policies is driven by banks' superior information about how material borrowers' low ESG performance is and by lenders' different preferences regarding their borrowers' ESG performance.

Keywords: ESG performance, debt structure, cost of debt

JEL Classification: G12, G21, D62

Suggested Citation

Luneva, Irina and Sarkisyan, Sergey, The ESG Divide: How Banks and Bondholders Differ in Financing Brown Firms (August 29, 2024). Available at SSRN: https://ssrn.com/abstract=4249210 or http://dx.doi.org/10.2139/ssrn.4249210

Irina Luneva

New York University (NYU) - Leonard N. Stern School of Business ( email )

44 West 4th Street
Office 10-88
New York, NY 10012-1106
United States

Sergey Sarkisyan (Contact Author)

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

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