Environmental, Social, and Governance (ESG) Integration under Asymmetric Information

55 Pages Posted: 18 Jan 2023 Last revised: 17 Apr 2023

Date Written: April 14, 2023


We present a model of ESG integration where borrowers can deviate from ESG promises ex-post. Borrowers are incentivized to pursue ESG projects only when lenders can charge a high borrowing rate, which decreases the borrowers’ private benefit from pursuing financial returns. In the presence of adverse selection on borrowers’ genuine preferences for ESG, there is an equilibrium in which borrowers invest in ESG when ESG lenders place bids first. Specifically, when ESG lenders take out non-ESG borrowers from the lending market, non-ESG lenders perceive the holdout borrowers to genuinely prefer ESG and demand a higher borrowing rate, which then leads to ESG integration.

Keywords: Socially responsible investments, ESG, moral hazard, adverse selection, financial market structure, greenwashing

JEL Classification: D82, D86, G23, G31

Suggested Citation

Chang, Dongkyu and Rhee, Keeyoung and Yoon, Aaron, Environmental, Social, and Governance (ESG) Integration under Asymmetric Information (April 14, 2023). Available at SSRN: https://ssrn.com/abstract=4325281 or http://dx.doi.org/10.2139/ssrn.4325281

Dongkyu Chang

City University of Hong Kong (CityU) ( email )

83 Tat Chee Avenue
Hong Kong

Keeyoung Rhee

Sungkyunkwan University - Department of Economics ( email )

110-745 Seoul

Aaron Yoon (Contact Author)

Northwestern University - Department of Accounting Information & Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

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