Where Do Brown Companies Borrow From?

Abstract

We study cost and sources of debt for companies with poor ESG performance. We find that, while both loan and bond financing are costlier for borrowers with poor ESG performance, ``brown" firms face a lower extra premium for borrowing from banks than ``green" firms. In addition, companies with poorer ESG performance obtain larger bank loans and borrow smaller amounts from the public bond market, gradually shifting their debt structure towards more bank-loan-heavy. We discuss multiple explanations for our findings: brown borrowers' financial risk, banks' superior information about their borrowers, public debt holders' inherent preference for high ESG performance firms, and public debt holders being subject to stricter ESG regulation than banks.

Keywords: ESG performance, debt structure, cost of debt

JEL Classification: G12, G21, D62