The ESG Divide: How Banks and Bondholders Differ in Financing Brown Firms
63 Pages Posted: 20 Oct 2022 Last revised: 10 Dec 2024
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: Suggested Citation