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

Abstract

We study credit providers and costs of debt for firms with low ESG performance. First, we find that, while both banks and public bondholders charge low-ESG borrowers a higher interest rate compared to high-ESG borrowers, the premium charged by banks is lower than by bondholders. Second, while bondholders reduce the amount of financing when borrowers' ESG performance deteriorates, banks keep the size of their loans the same 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 low-ESG borrowers' ESG materiality and by banks' different preferences regarding their borrowers' ESG performance.

Presented at: Central Bank Research Association*, China International Conference in Finance, Trans-Atlantic Doctoral Conference*, Alliance for Research on Corporate Sustainability UCLA Conference*, Northern Finance Association*

*denotes presentation by co-author

Mentioned by: Wharton ESG Initiative