ESG Risk and Syndicated Lending Relationship

ESG risk and Syndicated Lending Relationship
David P. Newton
School of Management, University of Bath
d.p.newton@bath.ac.uk
Pietro Perotti
p.perotti@bath.ac.uk
Ru Xie
r.xie@bath.ac.uk
Binru Zhao
bz423@bath.ac.uk
Electronic copy available at: https://ssrn.com/abstract=4165099

Abstract
We investigate the impact of Environmental, Social, and Governance (ESG) ratings on

borrower-lender matching and the consequences of this matching for syndicated loan contracts.
We find that firms with high ESG scores are more likely to borrow from banks likewise with
high ESG and that this lending relationship can improve a firm's future ESG performance. High
ESG firms are charged lower loan spreads and have fewer financial covenants imposed in their
loan contracts, especially when lenders are high ESG banks. Overall, ESG performance
impacts firms’ loan costs and their choice of lender.
JEL Classification: A13, G21, Q51, Q58
Keywords: ESG risk, Syndicated lending, Cost of loans, Information asymmetry, Bank monitoring

1. Introduction
With increased public awareness of ESG concerns, both lender banks and borrower
firms have been under pressure from institutional investors and authorities to enhance their
ESG performance and to integrate various ESG criteria into their lending decisions. In response,
banks have announced initiatives to strengthen their commitment to ESG topics. Specifically,
screening borrowers and negotiating loan contracts based on borrowers’ ESG performance has
been widely adopted. Recent research suggests that higher ESG performance is associated with
a lower cost of capital and cost of loans. Goss and Roberts (2011) investigate the relationship
between loan contracts and CSR and find that banks charge higher loan spreads for firms with
substantial CSR concerns. Similarly, Chava (2014) shows that firms with environmental
concerns are charged significantly higher spreads on bank loans. Hauptmann (2017) examines
sustainability performance and the cost of bank loans and finds that firms with higher
sustainability performance have lower loan spreads only when their lenders have a high
sustainability level. More recently, Delis et al., (2020) demonstrate that stranded fossil fuel
reserves are priced in the loan spread, and fossil fuel firms are charged higher spreads,
especially after 2015.
While the implications of ESG ratings on enterprises' financing costs and risks are well
established, little research has been undertaken on the impact of ESG performance on bank
screening of borrowers and borrowers' lender selection. Houston and Shan (2021) is the first
paper to study the propagation of ESG policies through lending relationships. Using data from
the U.S. syndicated loan market from 2007 to 2017, they find that banks positively influence
subsequent borrower ESG performance. This influence is more pronounced for bank-
dependent firms and banks that have higher ESG ratings than the firms. Subsequently, Degryse
et al., (2021) use global syndicated loans over the period 2011-2019 and find that “green”
borrowers are charged significantly lower loan spreads when the lenders are also classified as

“green”. Interestingly, they further show that the impact of “green-meets-green” is more
pronounced after the Paris Agreement in 2015. Although those studies focus on the lending
relationship and ESG performance, it is not clear yet whether ESG risk plays an important role
in shaping firm-lender matching relationships. Our study examines the link between ESG
performance and lending, bridging critical gaps in the literature and highlighting several
important research questions. Are high ESG firms more likely to borrow from high ESG banks?
Which component of ESG rating is the most crucial determinant in this relationship? What
drives a firm with high ESG performance to borrow from one bank instead of another? Do
banks committed to being responsible provide cheaper credit for high ESG firms than non-
responsible banks?
To address these questions, we use a novel dataset combining information from
Refinitiv Eikon, LPC Dealscan, and Compustat. This allows us to examine the mechanisms
behind the matching of banks and high ESG firms in the loan market. First, we construct two
proxies to measure banks’ ESG performance. Our first proxy is to directly use the banks’ ESG
rating provided by Refinitiv Eikon. Second, we construct an indirect proxy to measure banks’
ESG performance by following Delis et al., (2020) and define a bank as a responsible bank if
it is the signatory bank of Principles for Responsible Banking (PRB) under the United Nations
Environment Programme Finance Initiative (UNEP FI).
To investigate the impact of borrowers’ ESG ratings on the borrowers and lenders
matching, we first group borrowers into quintiles based on their ESG ratings in the year before
loan origination. We find that borrowers with higher ESG rating normally borrow from lenders
with higher ESG performance. In addition to univariate analysis, we regress banks’ ESG
ratings on the borrowers’ ESG ratings and control for variables at the loan facility-lead arranger
level. We show that the ESG rating of borrowers is positively associated with lead arrangers’
ESG ratings in a lending relationship. This relationship is robust after controlling for fixed

effects, borrowers’ financial characteristics, lenders’ financial characteristics. Specifically, a
one standard deviation increase in the borrower’s ESG rating is associated with a 7% higher
ESG rating of lenders, which provides multivariate evidence that high ESG firms are positively
associated with borrowing from high ESG banks. Furthermore, we investigate a lender’s choice
of high ESG borrowers by constructing a dummy variable High_ESG_Bank at the facility-firm
level. High_ESG_Bank equals one when the lead arrangers’ average ESG score is higher than
the mean value in the sample. We find that a borrower’s ESG rating is positively associated
with the likelihood of borrowing from banks with high ESG ratings. The results are particularly
strong with the Environmental and Governance components of the ratings.
We identify two mechanisms working behind the borrower and lender matching
according to ESG risk. First – we refer to this mechanism as “cheaper credit” – from the supply
side, the increasing voices from the public and regulatory bodies favouring responsible lending
have pressured banks into switching their lending standards to an ESG-orientation. Thus, banks
that have high ESG-ratings or are set to be responsible banks would have a strong incentive to
provide more credit to high ESG firms. Information asymmetry suffuses in the loan market,
not only between borrowers and lenders, but also between lead arrangers and participants. To
mitigate information asymmetry, financial covenants play a key role in monitoring borrower
performance and provide banks the chance to renegotiate loan contracts (Rajan and Winton,
1995; Bradley and Roberts, 2015; Griffin et al., 2019). Better ESG ratings are accompanied by
reduced information asymmetry (e.g., Reber et al., 2021; Baker et al., 2021)), contributing to
the decline of loan spreads and interconnection between lenders and borrowers. We anticipate
that borrowers with high ESG ratings have fewer financial covenants imposed on them and
reduced spreads due to the reduced information asymmetries between borrowers and lenders.
In addition, the decline of information asymmetries between lead arrangers and participants
accompanied by the increase of lenders’ ESG rating contribute to the “cheaper credit”, in both

price and non-price terms. Second – we refer to this mechanism as “monitoring avoidance” –
banks, especially high ESG banks, have a strong motivation to monitor and improve their
borrowers’ ESG performance (Houston and Shan, 2021). Poor ESG performance is associated
with higher credit risk (e.g., Jiraporn et al., 2014), legal risk (e.g., Hong and Liskovich, 2015;
Schiller 2018), higher CEO turnover risk (Dai et al., 2021) and downside risk (Hoepner et al.,
2017). Borrowers with poor ESG performance are incentivised to hide these risks by avoiding
tight monitoring and supervision from banks (Ben-Nasr, 2019), especially from high ESG
banks. Hence, we can expect that low ESG borrowers are less likely to borrow from high ESG
banks due to “monitoring avoidance”. As Houston and Shan (2021) suggest, banks could
propagate their ESG performance to their borrowers and shape their borrowers’ ESG
performance through the lending relationship. Therefore, high ESG banks have a stronger
incentive to monitor borrowers’ ESG performance and shape borrowers’ ESG activities.
However, these strict monitoring and activities’ shaping are not attractive for low ESG firms
considering trying to borrow from high ESG banks. Instead, they are more likely to borrow
from low ESG banks, avoiding strict scrutiny from high ESG lenders.
To investigate the aforementioned potential channels, we begin by examining how
borrowers' ESG performance affects loan prices and the non-price terms of the loans. The
findings indicate that the loan spread is inversely correlated with the borrowers' ESG ratings.
These findings are consistent with earlier research (e.g., Hasan et al., 2017; Hauptmann, 2017).
Further, we investigate whether responsible banks and non-responsible banks have different
attitudes toward ESG risk pricing in their loans. We split the sample into two sub-samples:
responsible bank originated-loan facilities and non-responsible bank originated-loan facilities.
The results show that the improvement of borrowers’ ESG rating leads to a more substantial
decline of spreads in the loan originated by responsible banks than the loans originated by non-
responsible banks. In addition, we find that the improvement of borrowers’ environmental

rating and social rating is also associated with more significant decline in the loan facilities
issued by responsible banks rather than non-responsible banks.
Financial covenants are important tools, widely inserted into loan contracts in order to
mitigate information asymmetry issues as well as to avoid financial performance deterioration
over the life of a loan. Higher ESG rating should be closely related to a decline in information
asymmetry. As a result, it could be expected that firms with high ESG ratings are subjected to
fewer financial covenants. However, there has been limited research on the relationship
between ESG performance and financial covenants. It is unclear if banks impose fewer
financial covenants for high ESG borrowers, particularly when they are responsible banks. We
use logit regressions to investigate the impact of ESG on the likelihood of incorporating
financial covenants. In line with our expectations, we find that banks are less likely to apply
financial covenants in loan contracts for high ESG firms. We also add an interaction term that
links a dummy variable for a high ESG borrower with a dummy variable for a responsible bank.
The estimation results are negative and highly significant, demonstrating that, when lenders
are responsible banks, they are less likely to impose financial covenants on firms with high
ESG. Moreover, the results remain robust when we break down the borrowers’ ESG rating into
three components (environmental pillar rating, social pillar rating, and governance pillar rating).
Overall, we find that borrowers' ESG ratings are inversely related to the numbers of financial
covenants, with the effect being stronger when lenders are responsible banks.
Finally, we document that borrowing from high ESG banks or responsible banks is
positively associated with borrowers’ future ESG ratings. In contrast, borrowing from low ESG
banks is negatively associated with subsequent borrowers’ ESG ratings. The result supports
the hypothesis that high ESG banks or responsible banks efficiently monitor and shape firms’
ESG ratings. Hence, firms that continuously want to improve their ESG performance are more
likely to borrow from high ESG banks or responsible banks. In contrast, borrowers with low

ESG ratings have a strong incentive to hide their ESG related risks by avoiding borrowing from
high ESG banks or responsible banks.
This paper contributes to the literature relating to ESG risk by investigating the role of
ESG rating on the matching between borrowers and lenders. Unlike Houston and Shan (2021),
who find that banking relationship acts as a transmission mechanism for promoting ESG
policies, and Degryse et al., (2021) who focus on loan pricing, our research addresses how ESG
rating impacts firms’ behaviours when they select their lenders and the potential reasons behind
this matching relationship. Unlike the vast majority of prior research, we also examine the role
of covenants. We propose two potential explanations behind the matching relationship:
“cheaper credit” and “monitoring avoidance.” In addition, our paper relies on data from U.S.
syndicated loans. Focusing on the U.S. market can help us avoid controlling for several
country-level characteristics to account for differences in economic conditions, the degree of
financial development across countries, and the impact of exchange rate on firms’ borrowing
behaviour. To the best of our knowledge, this paper provides the most comprehensive evidence
on the impact of ESG on the lending relationship within the relevant literature.
The remainder of the paper proceeds as follows. Section II presents the data and
summary statistics. Section III provides empirical evidence on whether high ESG firms in
favour of borrowing from high ESG banks. Section IV suggests potential mechanisms to
explain why high ESG are more likely to borrow from high ESG banks and responsible banks.
Section V provides evidence of whether the impact of ESG on loan pricing varies over time.
Section VI concludes.
2. Data and Sample Statistics
The principal sources of data for this paper are LPC DealScan, Refinitiv Eikon, the
United Nations Environment Programme, Finance Initiative (UNEP FI), and Compustat. To

construct the sample, we include all bank loans denominated in U.S. dollars and made to U.S.
public firms covered in Refinitiv Eikon over the 2007 to 2019 period. DealScan provides
detailed information on loan characteristics for each loan, such as size, loan spread, facility
amount, and other contract terms. In the literature, LPC DealScan has been widely used for
syndicated loan-related studies. Although both Refinitiv Eikon and Dealscan share the same
data source, coverage is slightly different. To check data consistency and extend data
availability, we follow Newton et al. (2020) and construct a link table connecting the two loan
databases with the unique identifier of the LPC tranche. After building the loan sample, we
follow Chava and Roberts (2008) link file to combine the loan sample and borrowers’ financial
characteristics from Compustat. However, the current link file provided by Chava and Roberts
(2008) only contains matches through the end of 2017. We follow Newton et al. (2020) and
extend the current version of the link file to the end of 2019 using the 6-digit CUSIP number
provided by both Refinitiv Eikon and Compustat. We keep observations without missing
borrowers’ financial characteristics at the end of the fiscal year before the loan issuance year.
This paper focuses on the impact of ESG risk on the matching between a borrower and
a bank. Lead lenders normally act as the managers for the loan with primary responsibility for
ex-ante due diligence and for ex-post monitoring of borrowers, which provide information
participant for participant lenders (Ivashina, 2009). Therefore, we only focus on the lead lender
in the syndication. We follow the definition of Bharath et al., (2011), and classify lead lenders
for each loan. Precisely, we classify a lender as a lead lender if the “LeadArrangerCredit” field
in the Dealscan indicates “Yes” or if the “LenderRole” field in the Dealscan indicates one of
the following: administrative agent, agent, lead arranger, arranger, or lead bank. Then we
follow the definition of Delis et al., (2020) and identify a lead bank as a responsible bank if it
signed the United Nations Environment Programme Finance Initiative (UNEP FI). Specifically,
we hand-match the lead lenders from the sample of bank loans to the member of Principles for

Responsible Banking (PRB) under the UNEP FI. UNEP FI is a global partnership established
between the United Nations Environment Program (UNEP) and the financial sector, which
supports global finance sector principles to catalyze integrations of sustainability into financial
market practice, which includes Principles for Responsible Banking (PRB), Principles for
Sustainable Insurance (PSI) and Principle for Responsible Investment (PRI). According to the
definition of PRB, the PRB are a unique framework for ensuring that signatory banks’ strategy
and practice are consistent with the Sustainable Development Goals. Until the end of 2019,
over 200 banks had opted to become signatory banks and promised to continuously improve
their sustainability performance and contribution to a world of sustainable transformation. In
addition, we obtain ESG ratings from Refinitiv Eikon to measure borrowers’ and lead lenders’
ESG performance. ESG database from Refinitiv Eikon is one of the most comprehensive and
recognized ESG databases globally, which covers over 80% of the global market cap and over
3,500 North American companies since 2002.
Chava and Roberts (2008) link file and the linking file constructed by Newton et al.,
(2020) provide the matched loan contract information and borrowers’ financial characteristics
information for the loan sample from 2007 to 2019. To obtain lenders’ financial characteristics,
we use the lender-loan link table provided by Schwert (2018) to connect DealScan lender
names with gvkey in Compustat for all lenders with at least $10 billion loan volume or at least
50 loans. In addition, for some loans with multiple lead lenders in the syndicate, we follow
Houston and Shan (2021) and calculate the equally-weighted average of financial
characteristics and ESG rating of lead-lenders in the loan syndication at the facility-firm level.
The summary statistics for the sample of loans and the corresponding borrowers and
lenders are presented in Table 1. All continuous variables are winsorized at the 1% and 99%
levels to reduce the effects of outliers. We have 24,558 loan facilities in my sample, taken out
by 3,804 U.S. public borrowers and granted by 70 U.S. lenders from 2007 to 2019. Panel A of
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Table 1 presents the summary statistics for loan variables, lender financial characteristics, and
borrower financial characteristics based on the facility-firm level sample. The mean value of
AISD is 245.312 basis points. The mean value of the natural logarithm facility amount is
19.460 million dollars, and the mean value of natural logarithm of maturity is 3.814. In addition,
46.54% of loan facilities have collateral requirements in our sample, 22.82% of loan facilities
are with performance-related pricing provisions, and 37.69% of loan facilities include
covenants in the loan contracts. The average ESG rating of borrowers in our sample is 43.99.
73.41% of borrowers are not bank-dependent firms (with credit rating). The mean value of
natural logarithm total asset in our sample is 8.1924. The average value of lenders is taken
across the pool of lead arrangers if the facility contains more than one lead arranger. We see
the mean value of average ROA for lead lenders is 0.005, the mean value of average assets for
lead arrangers is 13.862, and the mean value of average ESG ratings is 67.830. All summary
statistics of key variables are consistent with previous literature (e.g., Houston and Shan, 2020).
Panel B of Table 1 presents the summary statistics for loan variables, lender variables and
borrower variables based on the facility-lead arranger level. All of the statistics are consistent
with the summary statistics based on the firm-facility level sample.
Table 2 provides statistics on the lender ESG performance based on the change of
borrower ESG performance. We thereby sort borrowers into quartiles based on their ESG
ratings. We find that the mean value of lenders’ ESG ratings of lenders is lowest for borrowers
with lowest ESG ratings, followed by firms with lower quartile ESG ratings, firms with upper
quartile ESG ratings, and firms with the highest ESG ratings. The quartile analysis documents
that high ESG borrowers are more likely to borrow from high ESG lenders.
< INSERT TABLE 1 HERE >
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3. The Impact of ESG Rating on Firm-Bank Matching
Although our quartile analysis shows that high ESG borrowers are matched with high
ESG lenders, we could not alleviate the concern that the borrowers’ lender choice of borrowing
from high ESG lenders is connected with other firm characteristics. Therefore, we examine
whether a firm with a high ESG rating is more likely to receive a loan from a high ESG bank
by regressing bank ESG rating on the borrowers’ ESG rating and controlling variables at the
facility-lead arranger level.
𝐸𝐸𝐸𝐸𝐸𝐸 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑏𝑏𝑏𝑏 = 𝛽𝛽0 + 𝛽𝛽1 ∗ 𝐸𝐸𝐸𝐸𝐸𝐸 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑓𝑓𝑓𝑓−1 + 𝛽𝛽2 𝑋𝑋𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏−1 +∝𝑖𝑖 +∝𝑡𝑡 +∈𝑖𝑖𝑖𝑖 (1)
The dependent variable 𝐸𝐸𝐸𝐸𝐸𝐸 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑏𝑏𝑏𝑏 is the bank’s ESG performance in the fiscal year
of loan origination. The explanatory variable of interest 𝐸𝐸𝐸𝐸𝐸𝐸 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑓𝑓𝑓𝑓−1 is the borrower’s
ESG rating at the end of fiscal year prior to the loan origination date. The vector 𝑋𝑋𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏−1
contains bank, firm from the fiscal year before loan origination and loan-specific control
variables, including the borrower leverage ratio (Leverage Ratio); the natural logarithm of
borrower’s total asset in the fiscal year prior to loan origination (LN_AT); the market value to
book value of borrower (MtoB), the profit of borrower (Profit); an indicator that takes the value
of one if the borrower is bank dependent (Debt_rating); the natural logarithm of the loan
amount (LN_Amount); the natural logarithm of loan maturity (LN_Maturity). We also control
the bank-level characteristics: the ROA of lead banks (ROA_Bank); the natural logarithm of
lead bank’s assets (LN_AT_Bank); the natural logarithm of lead bank’s debt (LN_DEBT_Bank),
to mitigate the impact of omitted factors that are correlated with both the borrower attributes
of interest and the choice of bank.
Table 3 reports the OLS regression results of Eq. (1) with double-clustered standard
errors by firm and year to account for heteroskedasticity. We include facility-purpose fixed
12

effects, industry fixed effects and year fixed effects in our specifications. Columns (1) of Table
3 show that the coefficients on the 𝐸𝐸𝑆𝑆𝑆𝑆 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑓𝑓𝑓𝑓 are positive and statistically significant after
including year fixed effects and firm fixed effects. The estimation result remains consistent
even when we include lender fixed effects further (Column (2)). Specifically, a 1-standard-
deviation increase in borrower ESG rating is associated with 8.24% higher its lender ESG
rating. Overall, the results suggest that borrower ESG ratings are strongly and positively
associated with lender ESG ratings.
In the Columns (3) and (4) of Table 3, we report the matching between
𝐸𝐸𝐸𝐸𝐸𝐸 𝑐𝑐𝑐𝑐𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑓𝑓𝑓𝑓 and 𝐸𝐸𝐸𝐸𝐸𝐸 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑏𝑏𝑏𝑏 . 𝐸𝐸𝐸𝐸𝐸𝐸 𝑐𝑐𝑐𝑐𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑓𝑓𝑓𝑓 is the
borrower’s ESG controversial rating. The higher the ESG controversial ratings, the worse the
ESG performance, because the firm is revealed more negative ESG related issues. We can
anticipate the estimated results of ESG controversial ratings are opposite to the results of ESG
ratings (Columns (1) and (2)). The results indicate that firms with higher ESG controversial
ratings are matched with lenders with lower ESG ratings. Column (3) of Table 3 reports the
matching between 𝐸𝐸𝐸𝐸𝐸𝐸 𝑐𝑐𝑐𝑐𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑓𝑓𝑓𝑓 and 𝐸𝐸𝐸𝐸𝐸𝐸 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑏𝑏𝑏𝑏 . The estimation result on
𝐸𝐸𝐸𝐸𝐸𝐸 𝑐𝑐𝑐𝑐𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑓𝑓𝑓𝑓 is negative but insignificant when we only include year fixed
effects, and borrower fixed effects. But the result becomes statistically significant and negative
when we include year fixed effects, firm fixed effects and lender fixed effects (Column (4)).
Columns (5) and (6) report the estimated coefficients on 𝐸𝐸𝐸𝐸𝐸𝐸 combined 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑓𝑓𝑓𝑓 .
𝐸𝐸𝐸𝐸𝐸𝐸 combined 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑏𝑏𝑏𝑏 is the firm’s ESG rating discounted for significant ESG
controversies. The estimation results are positive and statistically significant, which further
provide solid evidence that the firms with high ESG performance are matched with lenders
with high ESG performance as well.
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While Table 2 shows that borrowers’ ESG ratings are positively associated with lenders’
ESG ratings, we only have limited evidence to support whether firms with high ESG ratings
are more likely to borrow from high ESG banks. To address this concern, we examine the
relationship between borrowers’ ESG rating and the likelihood of including high ESG banks
as lead arrangers by investigating the following empirical model at the facility-firm level. We
estimate the following logistic regression:
𝐻𝐻𝐻𝐻𝐻𝐻ℎ_𝐸𝐸𝐸𝐸𝐸𝐸_𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝑏𝑏𝑏𝑏 = 𝛽𝛽0 + 𝛽𝛽1 ∗ 𝐸𝐸𝐸𝐸𝐸𝐸 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑓𝑓𝑓𝑓 + 𝛽𝛽2 𝑋𝑋𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏−1 +∝𝑖𝑖 +∝𝑡𝑡 +∈𝑖𝑖𝑖𝑖 (2)
The dependent variable 𝐻𝐻𝐻𝐻𝐻𝐻ℎ_𝐸𝐸𝐸𝐸𝐸𝐸_𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝑏𝑏𝑏𝑏 is a dummy variable indicating that the
lead arrangers’ ESG rating is higher than the mean value of ESG rating in our sample.
𝐸𝐸𝐸𝐸𝐸𝐸 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑓𝑓𝑓𝑓 is the primary explanatory variable. Our main interest is the size, sign, and
statistically significant of the coefficient on the explanatory variable 𝐸𝐸𝐸𝐸𝐸𝐸 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑓𝑓𝑓𝑓 , which
captures the impact of borrowers’ ESG rating on the likelihood of borrowing from high ESG
banks. We also include borrower characteristics, lender characteristics, loan characteristics,
and fixed effects from Column (1) to Column (4) in Table 4. As shown, the coefficient of
𝐸𝐸𝐸𝐸𝐸𝐸 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑓𝑓𝑓𝑓 in Column (1) is positive and statistically significant and the estimated results
on ESG combined score, Environmental component, and Governance components are also
positive, and statistically significant. Specifically, a one-unit increase in borrower ESG rating
is associated with a 0.11% higher likelihood of borrowing from high ESG banks. In addition,
one unit increase of borrower environmental pillar score and governance pillar score is
associated with 0.11% and 0.08% likelihood of borrowing from high ESG banks, respectively.
However, we did not find enough evidence to support the relationship between the social pillar
score of borrowers and the likelihood of borrowing high ESG banks. Taken together these
findings strongly support the likelihood of borrowing from high ESG banks increases with the
14

ESG rating of the borrower.
Refinitiv ESG scores are primarily designed to measure a firm’s relative ESG
performance across ten themes based on company-reported data. However, the self-reported
methodology is more manipulative and subject to green-washing bias. In addition, Refinitiv
provides limited data on the coverage of bank ESG scores. Therefore, we further proxy the
sustainability level of the bank based on whether the bank is the signatory bank of PRB. Unlike
using ESG rating to measure the sustainability level of the bank, the signatory banks of PRB
commit to aligning their business with sustainability targets. Their commitments are reported
through an annual review. A civil society advisory body holds the signatories to account for
their annual review. If signatory banks cannot evidence necessary changes will lose their status
as a signatory bank. Compared with self-reporting-based ESG scores, the signatory banks are
not subject to green-washing bias. Next, we examine the relationship between the bank’s status
as a signatory under PRB and its ESG scores by investigating the following empirical model
at the facility-lead arranger level.
𝐸𝐸𝐸𝐸𝐸𝐸 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑏𝑏𝑏𝑏 = 𝛽𝛽0 + 𝛽𝛽1 ∗ 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑏𝑏𝑏𝑏 + 𝛽𝛽2 𝑋𝑋𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏−1 +∝𝑖𝑖 +∝𝑡𝑡 +∈𝑖𝑖𝑖𝑖 (3)
The dependent variable 𝐸𝐸𝐸𝐸𝐸𝐸 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑏𝑏𝑏𝑏 denotes the ESG rating of a lead bank in year t.
𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑡𝑡 is a dummy variable which equals 1 if the bank is a signatory bank of PRB.
𝑋𝑋𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏−1 denotes the vector of loan characteristics, lender characteristics, and borrower
characteristics. The coefficient on the dummy variable 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑏𝑏𝑡𝑡 is what we are
interested in, reflecting whether the signatory bank of PRB has a higher ESG rating than the
non-signatory bank. Table 5 reports the estimation results of Eq. (3) across controlling different
fixed effects from Columns (1) to (3). We can find that the coefficient on the dummy variable
15

𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑡𝑡 remains highly significant and positive when we include year fixed effects,
firm fixed effects, and lender fixed effects. The results indicate that signatory banks of PRB
have significantly higher ESG ratings than non-signatory banks. This result confirms that using
the membership of PRB to proxy the sustainability level of banks is reasonable.
4. Impact of ESG rating on corporate loans spreads
To explore the mechanism behind the lender choice of high ESG firms, we first
investigate whether loan spreads are affected by borrower ESG rating and whether this effect
is more pronounced when lenders are responsible banks (signatory banks). We estimate the
following model at the facility-firm level:
𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑏𝑏,𝑓𝑓,𝑙𝑙,𝑡𝑡 = 𝛽𝛽0 + 𝛽𝛽1 ∗ 𝐸𝐸𝐸𝐸𝐸𝐸 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑓𝑓𝑓𝑓 + 𝛽𝛽2 𝑋𝑋𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏−1 +∝𝑖𝑖 +∝𝑡𝑡 +∈𝑖𝑖𝑖𝑖 (4)
Where 𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑏𝑏,𝑓𝑓,𝑙𝑙,𝑡𝑡 is the all-in-drawn spread (AISD) over Libor plus facility
fee of loan facility 𝑙𝑙 granted by bank b to firm f in year t. 𝐸𝐸𝐸𝐸𝐸𝐸 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑓𝑓𝑓𝑓 which denotes the
ESG rating of firm f in year t. 𝑋𝑋𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏−1 contains lender-, borrower-, and loan-level
characteristics as controls. We present the estimation results based on the whole loan facility
sample. The results show that a firm’s ESG rating and its two components (environmental pillar
score and social pillar score) are negatively associated with loan spreads. However, there is no
clear evidence that borrower governance pillar score is priced in loan spread because the
coefficient on Governance rating_Firm is insignificant. To investigate whether there are
different attitudes towards the ESG rating on loan pricing between responsible banks and non-
responsible banks. We conduct a sub-sample analysis by splitting the sample into multiple
groups. Table 7 present the estimation results of Eq. (4). Panel A of Table 7 reports the relation
16

between borrower ESG rating and AISD based on the loan facilities issued by responsible
banks. The results demonstrate a negative and significant relation between AISD and
borrowers’ ESG rating. In almost estimations with respect to overall ESG rating (Column (1)),
environmental pillar score (Column (2)), and social pillar score (Column (3)). Then we present
Eq. (4) estimates for loan facilities issued by non-responsible banks. The results show that the
absolute value of the estimated coefficient is much smaller than that in Panel A. Specifically,
a 1-standard-deviation increase in borrower ESG rating is associated with a decrease of 6% of
AISD for loans issued by responsible banks. However, a 1-standard-deviation increase in
borrower ESG rating is related to only a reduction of 5% of AISD of loans issued by non-
responsible banks, which means high ESG rating is priced cheaper by responsible banks than
non-responsible banks.
5. Impact of ESG rating on financial covenants
Financial covenants are widely used clauses in loan packages to protect creditors’
interests and mitigate information asymmetry issues. We note that the vast majority of prior
literature on ESG ratings and syndicated loans has not examined the role of covenants. The
lower degree of information asymmetry driven by higher borrower’s ESG rating. Therefore,
we expect a borrower’s ESG rating to be negatively associated with the number of financial
covenants or with the possibility of imposing financial covenants in the loan contract. We first
investigate the impact of borrowers’ ESG rating on the likelihood of imposing financial
covenants in loan contracts. The estimation results are reported in Table 8. In Panel A of Table
8, we find the coefficients of borrowers’ ESG rating, environmental rating, and social rating
are statistically significant and negative. We do not find evidence that supports the relationship
17

between governance rating and the likelihood of imposing financial covenants. In Panel B of
Table 8, we add an interaction term linking a dummy variable for the responsible bank and a
dummy variable for the high ESG firm. The high ESG firm is defined as the firms’ ESG score
being higher than the mean value of borrowers’ ESG score in our sample. We find that
coefficients are significant and negative in Columns (1) to (4) of Table 8, indicating that firms
with high ESG rating or high pillar scores (high environmental pillar score, high social pillar
score, and high governance pillar score) are less likely to be imposed financial covenants when
they borrow from responsible banks.
Next, we investigate whether the increase of borrowers’ ESG rating significantly
reduces the number of financial covenants and whether the relation is more pronounced when
banks are responsible banks. Our results show that firms’ ESG score is negatively associated
with the number of financial covenants (Table 9). The relation still exists when we break down
the borrower’s ESG rating into three subcomponents (environmental pillar score, social pillar
score, and governance pillar score). In Panel B, we construct an interaction term linking a
dummy variable for the responsible bank and a dummy variable for the high ESG firm. In
Column (1) of Panel B, the result demonstrates a strong negative and significant coefficient on
the interaction term ResponsibleBank*High_ESG rating_Firm. In addition, the coefficients of
interaction terms in Column (2), Column (3), and Column (4) are also strong negative and
highly significant. The results of Panel B confirm the hypothesis that the decline of financial
covenants is more pronounced for high ESG firms borrowing from responsible banks.
18

6. The consequence of borrowing from responsible banks and high ESG banks
This section explores how borrower ESG ratings change through their lending
relationships and, relatedly, how different lenders affect the future ESG ratings of the
borrowers. First, we examine the direct impact of the lending relationship on the borrowers’
ESG rating. The empirical analysis is estimated by the following OLS specification:
𝐸𝐸𝐸𝐸𝐸𝐸 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑓𝑓𝑡𝑡+1 = 𝛽𝛽0 + 𝛽𝛽1 ∗ 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑏𝑏𝑏𝑏 + 𝛽𝛽2 𝑋𝑋𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏−1 +∝𝑖𝑖 +∝𝑡𝑡 +∈𝑖𝑖𝑖𝑖 (5)
Where 𝐸𝐸𝐸𝐸𝐸𝐸 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑓𝑓𝑡𝑡+1 is the borrowers’ ESG rating in the year after the loan initiation
date t, 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑏𝑏𝑏𝑏 is a dummy variable which equals one if the lender is a signatory
bank of PRB and 0 otherwise. We also include control variables including borrower
characteristics and loan characteristics. In addition, industry and year-fixed effects are also
included. All of the standard errors are clustered at the borrower and year level.
The estimation result of Eq. (5) is presented in Column (1) of Table 10. The key
coefficient of interest, the 𝛽𝛽1 is statistically significant and negative, which indicates that
borrowing from responsible banks is consequently associated with ESG performance
improvement in the following year. In addition, we also use a dummy variable
𝐻𝐻𝐻𝐻𝐻𝐻ℎ_𝐸𝐸𝐸𝐸𝐸𝐸_𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝑏𝑏𝑏𝑏 to replace 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑏𝑏𝑏𝑏 in the Eq.(5). 𝐻𝐻𝐻𝐻𝐻𝐻ℎ_𝐸𝐸𝐸𝐸𝐸𝐸_𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝑏𝑏𝑏𝑏 is a
dummy variable which equals one if the average ESG rating of lead arrangers is higher than
the mean value of lead arrangers in my facility-firm level sample and zero otherwise. The
estimation results are shown in Column (2) of Table 10, which confirms that borrowing from
high ESG banks is associated with the borrower’s ESG performance improvement after the
loan origination. Our results are consistent with Houston and Shan (2020) that bankers have a
strong incentive to reduce adverse ESG incidents and improve borrowers’ ESG rating through
loan monitoring.
19

7. Conclusion
Concerns about an impending sustainability crisis have prompted us to reconsider the
link between firms’ financing choices and long-term sustainable development vision. In light
of this background, the results in understanding whether the ESG rating plays an important role
in the formation of a lending relationship. Our findings contribute to the existing knowledge
of how borrowers select their lenders.
We present novel evidence on the mechanism behind matching firms and banks and the
implications of this matching for the loan contracts. We show that enterprises with high ESG
scores are more inclined to borrow from banks with high ESG scores. This implies that the
ESG performance of borrowers impacts the formation of lending relationships. Our results also
provide further evidence to support potential mechanisms behind findings. First, high ESG
borrowers face lower loan spreads and fewer financial covenants when lenders also have high
ESG performance or are committed to being responsible due to “cheaper credit” hypothesis.
Second, "monitoring avoidance" suggest that enterprises with low ESG ratings are less likely
to borrow from high ESG lenders to avoid bank monitoring. Further, firms borrow from banks
with strong ESG performance are more likely to enhance their ESG performance in the year
after loan origination. This is because high ESG banks have stronger motivation to monitor
borrowers’ ESG performance after the loan origination. In this context, our research has
significant policy implications by demonstrating the critical role of green banks in achieving
sustainable development goals.
20

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22

Table 1: Summary Statistics
This table presents the summary statistics for key variables of loan characteristics, borrower characteristics, and lender characteristics. Panel A
presents the summary statistics at the facility-firm level sample. All-in-drawn spread (bps) is the basis point spread over LIBOR plus the facility
fee; Amount is the size of facility in $ millions; Maturity is the maturity of the facility in months; Secured indicator is an indicator that takes
the value of one if the facility is secured, and zero otherwise; Performance pricing indicator is an indicator that takes the value of one if
performance pricing provisions are included int the facility, and zero otherwise; Covenants indicator is an indicator that takes the value of one
if the loan has covenants, and zero otherwise; Total asset is the natural logarithm of borrower's total assets at the end of the fiscal year prior to
the current loan in $ millions; Leverage is the borrower's book leverage ratio at the end of fiscal year prior to the current loan, calculated as total
debt divided by the book value of total assets. Profit is calculated as the borrower's EBIT divided by the total assets. Debt rating is a dummy
variable that equals one if the borrower is rated by S&P long-term credit rating, and zero otherwise. ESG rating is borrower's ESG rating.
Average ROA is the equally weighted average of lead lenders' ROA. Average Asset is the equally weighted average of lead arrangers' total
assets. Average ESG rating is the equally weighted average of lead lenders' ESG rating. Panel B presents the summary statistics at the facility-
lead arranger level sample. All continuous variables are winsorized at the 1% and 99% levels.
N Mean Std. dev.

Loan variables:
All-in-spread-drawn (bps) 18,926 245.312 154.395
Amount ($ million) 24,552 19.460 1.487
Maturity (months) 24,021 3.814 0.623
Secured indicator 24,558 0.465 0.499
Performance pricing indicator 24,558 0.228 0.420
Covenants indicator 24,558 0.377 0.485
Borrower Variables:
AT_Firm 24,257 8.192 1.834
Leverage_Firm 22,594 0.328 0.240
Profit_Firm 24,229 0.076 0.073
Debt_rating 20,675 0.734 0.442
ESG rating_Firm 8,744 43.995 20.579
Lender variables:
Average ROA 23,642 0.005 0.013
Average Asset 24,558 13.862 0.836
Average ESG rating 14,909 67.830 12.716
Panel B: facility-lead arranger level sample
Loan variables:
All-in-spread-drawn (bps) 51,378 231.246 152.319
Amount ($ million) 63,492 19.993 1.471
Maturity (months) 62,425 3.861 0.587
Secured indicator 63,504 0.440 0.496
Performance pricing indicator 63,504 0.221 0.415
Covenants indicator 63,504 0.348 0.476
Borrower Variables:
AT_Firm 62,756 8.832 1.827
Leverage_Firm 57,767 0.349 0.235
Profit_Firm 62,692 0.521 115.199
Debt rating 54,350 0.820 0.384
ESG rating_Firm 24,005 46.445 20.672
Lender variables:
ROA_Bank 57,432 0.005 0.011
AT_Bank 62,756 8.832 1.828
ESG rating 33,568 68.816 11.902
23

Table 2: Borrower and lender matching based on quintiles
This table presents the changes of borrowers' ESG performance via changes in lenders' ESG performance. ***, **, * denote
significance at the 1, 5 and 10 % level, respectively.
Quintile Lender ESG performance
1(Highest Borrower ESG Performance) 72.462
2 71.057
3 70.367
4(Lowest Borrower ESG performance) 69.895
Q4-Q1 -2.567***
t-stat (-10.497)
24

Table 3: Conditional Matching: Whether high ESG firms are matched with high ESG lenders? (loan facility-lead arranger
level)
This table presents the regressions of the borrowers' ESG performance on the lenders' ESG performance at the loan facility-
lead arranger level. The independent variable is the borrowers' ESG rating, and the dependent variable what we interested in
is the lender's ESG rating. We control for firm financial characteristics, loan characteristics and lender characteristics. We
also control year fixed effects, lender fixed effects and borrower fixed effects respectively. The standard errors are clustered
by borrower and year. to account for heteroskedasticity. T-statistics are reported in parentheses. ***, **, * denote significance
at the 1, 5 and 10 % level, respectively.
Dependent var.=ESG
(1) (2) (3) (4) (5) (6)
rating Bank
0.0431*** 0.0335**
ESG rating
(2.64) (2.42)
-0.00721 -0.00718*
ESG controversial rating
(-1.39) (-1.71)
0.0288** 0.0193*
ESG combined rating
(2.21) (1.69)
0.273 -2.643* 0.510 -2.449* 0.272 -2.671*
Leverage
(0.17) (-1.92) (0.32) (-1.81) (0.17) (-1.92)
-0.740 -0.379 -0.724 -0.364 -0.721 -0.367
Ln_AT_Firm
(-1.49) (-0.379) (-1.46) (-0.81) (-1.44) (-0.81)
0.000135 -0.0027 0.000056 -0.0028 -0.000452 -0.00319*
MtoB_Firm
(0.06) (-1.63) (0.02) (-1.61) (-0.19) (-1.77)
0.919 1.568 0.831 1.519 1.009 1.655
Profit_Firm
(0.59) (1.23) (0.54) (1.20) (0.65) (1.32)
-1.947** -1.077 -1.985** -1.11 -1.995** -1.109
Debt_rating
(-2.08) (-0.89) (-2.09) (-0.90) (-2.05) (-0.88)
-152.8*** -103.4*** -151.4*** -100.9** -150.3*** -100.6**
ROA_bank
(-3.57) (-2.60) (-3.55) (-2.55) (-3.54) (-2.54)
7.300*** -7.518*** 7.315*** -7.424*** 7.310*** -7.484***
Ln_AT_Bank
(10.09) (-3.95) (10.10) (-3.91) (10.07) (-3.94)
-2.457*** -1.078*** -2.450*** -1.067*** -2.448*** -1.056***
Ln_DT_Bank
(-13.78) (-3.18) (-13.77) (-3.15) (-13.73) (-3.12)
0.0645 -0.27 0.0574 -0.276 0.034 -0.294*
Ln_Maturity
(0.32) (-1.58) (0.29) (-1.62) (0.17) (-1.73)
0.156 0.743** 0.0631 0.665** 0.0716 0.686**
Secured indicator
(0.37) (2.33) (0.15) (2.13) (0.18) (2.21)
Performance Pricing -0.661** -0.470* -0.704** -0.504* -0.671** -0.472*
Indicator (-2.26) (-1.70) (-2.37) (-1.80) (-2.25) (-1.67)
-0.488 -0.0668 -0.459 -0.0495 -0.526 -0.104
Covenant-lite Indicator
(-1.28) (-0.20) (-1.19) (-0.15) (-1.40) (-0.31)
Year FE Yes Yes Yes Yes Yes Yes
Lender FE No Yes No Yes No Yes
Borrower FE Yes Yes Yes Yes Yes Yes
N 5,077 5,076 5,077 5,076 5,077 5,076
Adj. R^2 0.616 0.743 0.615 0.742 0.615 0.742
25

Table 4: Each component of ESG rating and lender choices (loan facility-firm level)
This table presents the logistic regressions of each component of borrowers' ESG performance on the lenders' ESG
performance at the loan facility-firm level. The dependent variable is a dummy variable High ESG Bank that equals one if the
lead arranger's ESG rating is higher than the average value of ESG rating in our sample. Column (1) reports the logistic
regression between a dummy variable High ESG Bank and borrowers' ESG ratings. Column (2) reports the logistic regression
between High ESG bank and borrowers' ESG combined rating. Columns (3) to (4) report the relationship between each
component of ESG rating with High ESG bank respectively. In addition, we controlled borrower characteristics, lender
characteristics, and loan characteristics. Industry fixed effects, year fixed effects and loan purpose fixed effects are also
included in all specifications. Standard errors are clustered by borrower to account for heteroskedasticity. T-statistics are
reported in parentheses. ***, **, * denote significance at the 1, 5 and 10 % level, respectively.
Dependent var.=High ESG

(1) (2) (3) (4) (5)
Bank
0.00947**
ESG rating_Firm
(2.09)
0.00938**
ESG combined rating_Firm
(2.01)
Environmental pillar 0.00921**

rating_Firm (2.55)
0.00266
Social pillar rating_Firm
(0.66)
0.00702**
Governance pillar rating_Firm
(1.97)
Borrower Characteristics Yes Yes Yes Yes Yes

Lender Characteristics Yes Yes Yes Yes Yes
Loan Characteristics Yes Yes Yes Yes Yes
Industry FE Yes Yes Yes Yes Yes
Year FE Yes Yes Yes Yes Yes
Purpose FE Yes Yes Yes Yes Yes
Obs 3,762 3,762 3,762 3,762 3,762
Pseudo R2 0.263 0.263 0.265 0.261 0.263
26

Table 5: Do Signatory Banks(Responsible banks) have better ESG performance？(loan facility-lead arranger level)
This table represents whether banks claimed to be responsible banks have higher ESG rating. The dependent variable ESG
rating Bank is banks' ESG rating. The independent variable ResponsibleBank is a dummy variable that equals one if the bank
signed to be a responsible bank, and zero otherwise. The analysis is conducted at the loan facility-lead arranger level. The
coefficient of ResponsibleBank indicate that whether the responsible bank has higher ESG rating than the non-responsible
bank. In addition, we controlled borrower characteristics, lender characteristics and loan characteristics in each specification.
In Column (1), we controlled year fixed effects only. In Column (2), we controlled year fixed effects and firm fixed effects.
In Column (3), we controlled year fixed effects, firm fixed effects, and lender fixed effects. All estimation results remain
consistent. Standard errors are double-clustered by firm and year. Standard errors are double-clustered by both firm and year
and are reported in parentheses. ***, **, and * correspond to statistical significance at the 1%, 5%, and 10% level, respectively.
Dependent var.=ESG rating Bank (1) (2) (3)
1.621*** 2.992*** 1.454***

ResponsibleBank
(3.99) (4.88) (2.69)
Borrower Characteristics Yes Yes Yes

Lender Characteristics Yes Yes Yes
Loan Characteristics Yes Yes Yes
Year FE Yes Yes Yes
Firm FE No Yes Yes
Lender FE No No Yes
Obs 11,019 10,670 10,669
Adj R^2 0.656 0.760 0.833
27

Table 6: Is ESG risk priced in loan spreads?
This table presents relationship between firm ESG rating and loan pricing. The dependent variable is AISD (all-in-spread-
drawn), and the analysis is conducted at the firm-loan facility level. The coefficients of independent variables indicate that
whether the borrower’s ESG rating and its each component is priced in loan spreads. All specifications include purpose fixed
effects, industry fixed effects, and year fixed effects. Standard errors are double-clustered by both firm and year and are
reported in parentheses. ***, **, and * correspond to statistical significance at the 1%, 5%, and 10% level, respectively.
Dependent var.=AISD (1) (2) (3) (4)

-0.281***
ESG rating_Firm
(-2.86)
Environmental pillar -0.152**
rating_Firm (-2.25)
-0.272***
(-3.22)
-0.0977
(-1.20)
Borrower Characteristics Yes Yes Yes Yes
Loan Characteristics Yes Yes Yes Yes
Year FE Yes Yes Yes Yes
Industry FE Yes Yes Yes Yes
Purpose FE Yes Yes Yes Yes
Obs 5,110 5,110 5,110 5,110
Adj R^2 0.432 0.431 0.432 0.430
28

Table 7: Impact of ESG risk on loan spreads (responsible banks VS. non- responsible banks)
This table presents the different ESG pricing strategy on loan spreads between responsible banks and non-responsible
banks. The dependent variable is AISD. Independent variables include firm ESG rating and each component of firm
ESG rating. Panel A is the loan sample issued by responsible banks. Panel B is the loan sample issued by non-responsible
banks. Our analysis is conducted at the loan facility level. We controlled borrower characteristics, loan characteristics.
Year fixed effects, industry fixed effects and purpose fixed effects are included in all specifications. Standard errors are
double-clustered by both firm and year and are reported in parentheses. ***, **, and * correspond to statistical
significance at the 1%, 5%, and 10% level, respectively.
Panel A: Responsible bank facilities

Dependent var.=AISD (1) (2) (3) (4)
-0.355**
ESG rating_Firm
(-2.49)
-0.289***
Environmental pillar rating_Firm
(-2.90)
Social pillar rating_Firm -0.301**

(-2.70)
Governance pillar rating_Firm -0.0724

(-0.60)
Obs 2436 2436 2436 2436
Adj R^2 0.4477 0.4485 0.4472 0.4453
Panel B: Non-Responsible bank facilities

-0.313**
ESG rating_Firm
(-2.53)
-0.0961
Environmental pillar rating_Firm
(-1.12)
-0.280***
(-2.77)
-0.148
(-1.40)
Obs 2674 2674 2674 2674
Adj R^2 0.4258 0.424 0.4272 0.4243
29

Table 8: Impact of ESG risk on the likelihood of issuing financial covenants (responsible banks vs. non- responsible banks)
This table presents the different ESG pricing strategy on non-price terms between responsible banks and non-responsible
banks. The dependent variable Covenant_indicator is a dummy variable that equals one if the loan package includes financial
covenants, and zero otherwise. Independent variables include firm ESG rating and each component of firm ESG rating.
Panel A provides an estimation results between the likelihood of imposing financial covenants and firm ESG rating. In Panel
B, we construct an interaction term linking a dummy variable ResponsibleBank and a dummy variable High ESG firm. We
controlled borrower characteristics, loan characteristics. Year fixed effects, industry fixed effects and purpose fixed effects
are included in all specifications. Standard errors are clustered by firm and are reported in parentheses. ***, **, and *
correspond to statistical significance at the 1%, 5%, and 10% level, respectively.
Panel A
Dependent var.=Covenant_indicator (1) (2) (3) (4)
-0.00932***
ESG rating_Firm
(-6.40)
-0.0101***
Environmental_rating_Firm
(-9.59)
-0.00651***
Social rating_Firm
(-5.11)
-0.000298
Governance rating_Firm
(-0.24)
Obs 6,835 6,835 6,835 6,835
Pseudo R2 0.069 0.074 0.067 0.064
Panel B
ResponsibleBank *High_ESG -0.375***

rating_Firm (-4.47)
ResponsibleBank *High_ -0.320***

Environmental_rating_Firm (-3.77)
ResponsibleBank *High_Social -0.318***

rating_Firm (-3.86)
ResponsibleBank *High_Governance -0.427***

rating_Firm (-5.06)
Obs 18,622 18,622 18,622 18,622
Pseudo R2 0.090 0.090 0.090 0.090
30

Table 9: Impact of ESG risk on the number of financial covenants (responsible banks vs. non- responsible banks)
This table presents the different ESG pricing strategy on non-price terms between responsible banks and non-responsible banks.
The dependent variable is the number of financial covenants included in the loan package. Panel A provides an estimation
results between estimation results between the number of financial covenants and firm ESG rating. In Panel B, we construct
an interaction term linking a dummy variable ResponsibleBank and a dummy variable High ESG firm. We controlled borrower
characteristics, loan characteristics. Year fixed effects, industry fixed effects and purpose fixed effects are included in all
specifications. Standard errors are double-clustered by both firm and year and are reported in parentheses. ***, **, and *
correspond to statistical significance at the 1%, 5%, and 10% level, respectively.
Panel A
Dependent var.=Nr.Covenants (1) (2) (3) (4)
-0.00558***
ESG rating_Firm
(-7.08)
-0.00498***
Environmental_rating_Firm
(-9.28)
-0.00415***
Social rating_Firm
(-5.39)
-0.00118*
Governance rating_Firm
(-1.85)
Obs 6,835 6,835 6,835 6,835
Adj R^2 0.222 0.229 0.219 0.210
Panel B
Dependent var.=Nr.Covenants (1) (2) (3) (4)
-0.114**
ResponsibleBank*High_ESG rating_Firm
(-2.19)
-0.118**
ResponsibleBank *High_Environmental_rating_Firm
(-2.22)
-0.112**
ResponsibleBank *High Social rating_Firm
(-2.22)
-0.134**
ResponsibleBank *High Governance rating_Firm
(-2.55)
Obs 12,600 12,600 12,600 12,600
Adj R^2 0.289 0.289 0.289 0.291
31

Table 10: The consequence on ESG performance by borrowing responsible banks.
This table presents the different consequences of borrowing from responsible banks, high ESG banks and low ESG banks. The dependent variable is borrowers'
ESG rating. In Column (1), the independent variable is a dummy variable that equals one if the bank is a responsible bank, and zero otherwise. In Columns (2)
and (3), the independent variable High ESG_Bank and Low ESG_Bank are dummy variables that equals one of the bank’s ESG rating is higher than the average
value in our sample and lower than the average value in our sample respectively. We also controlled borrower characteristics, loan characteristics. All of
independent variables are the values at the end of year prior to the loan origination date. In addition, we control year fixed effects, industry fixed effects and
purpose fixed effects in all specifications. Standard errors are double-clustered by both firm and year and are reported in parentheses. ***, **, and * correspond
to statistical significance at the 1%, 5%, and 10% level, respectively.
Dependent var.=ESG rating_Firm (1) (2) (3)
5.129***
L. ResponsibleBank
(5.52)
2.337**
L. High ESG_Bank
(2.24)
-2.894***
L. Low ESG_Bank
(-2.93)
Borrower Characteristics Yes Yes Yes
Loan Characteristics Yes Yes Yes
Year FE Yes Yes Yes
Industry FE Yes Yes Yes
Purpose FE Yes Yes Yes
Obs 1,761 1,761 1,761
Adj R^2 0.369 0.359 0.368
32

Appendix
OA1 Variable Definition
Variable Definition Source
ESG rating_Firm The borrower's ESG performance rating at the end of fiscal year prior the current loan. Refinitv Eikon
Environmental pillar The borrower's environmental performance rating at the end of fiscal year prior the
Refinitv Eikon
rating_Firm current loan.
Social pillar rating_Firm The borrower's social performance rating at the end of fiscal year prior the current loan. Refinitv Eikon
Governance pillar The borrower's governance performance rating at the end of fiscal year prior the current
Refinitv Eikon
rating_Firm loan.
The borrower's ESG controversial rating at the end of fiscal year prior the current loan
ESG controverisal
is a rating calculated based on 23 ESG controversy topics, with recent controversies Refinitv Eikon
rating_Firm
reflected in the latest complete period.
The borrower's overall ESG combined (ESGC) score at the end of fiscal year prior
ESG combined
the current loan, which is discounted for significant ESG controversies impacting the Refinitv Eikon
rating_Firm
borrower.
Leverage_Firm The borrower's book leverage ratio at the end of fiscal year prior the current loan. Compustat
The borrower's natural log of the total assets at the end of fiscal year prior the current
Log_AT_Firm Compustat
loan.
Mkt_Book The market value scaled by book value at the end of fiscal year prior the current loan. Compustat
Profit_Firm The borrower's EBIT scaled by total asset. Compustat
An indicator that equals one if the borrower is rated by S&P long-term credit rating, Compustat and
Debt_rating
and zero otherwise. Capital IQ
ROA_bank The lead arranger's operating income scaled by total assets. Compustat
The lead arranger's natural log of the total assets at the end of fiscal year prior the
Log_AT_Bank Compustat
current loan.
Log_DT_Bank The lead arranger's total debt at the end of fiscal year prior the current loan. Compustat
Dealscan and
Log_Maturity Natural log of the maturity of the loan facility in months.
Eikon
An indicator variable that takes a value of one if the facility is secured, and zero Dealscan and
Secured indicator
otherwise. Eikon
Performance Pricing An indicator variable that takes a value of one if the facility has performance pricing Dealscan and
Indicator features, and zero otherwise. Eikon
An indicator variable that takes a value of one if the loan has covenants, and zero Dealscan and
Covenant-lite Indicator
otherwise. Eikon
A dummy variable that takes one if the lead arranger's ESG rating is higher than the
High ESG bank mean value of lender ESG performance, and zero otherwise. Refinitv Eikon
A dummy variable that takes one if the borrower’s ESG rating is higher than the mean
High ESG Firm value of borrower ESG performance, and zero otherwise. Refinitv Eikon
A dummy variable that equals one if the lender is the signatory bank of Principles for
ResponsibleBank Responsible Banking (PRB) under the United Nations Environment Programme UNEP FI website
Finance Initiative (UNEP FI) and zero otherwise.
33

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ESG Risk and Syndicated Lending Relationship

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ESG risk and Syndicated Lending Relationship

Electronic copy available at: https://ssrn.com/abstract=4165099

We investigate the impact of Environmental, Social, and Governance (ESG) ratings on

JEL Classification: A13, G21, Q51, Q58

Electronic copy available at: https://ssrn.com/abstract=4165099

especially after 2015.

Electronic copy available at: https://ssrn.com/abstract=4165099

To address these questions, we use a novel dataset combining information from

Environment Programme Finance Initiative (UNEP FI).

Electronic copy available at: https://ssrn.com/abstract=4165099

of high ESG borrowers by constructing a dummy variable High_ESG_Bank at the facility-firm

strong with the Environmental and Governance components of the ratings.

Electronic copy available at: https://ssrn.com/abstract=4165099

To investigate the aforementioned potential channels, we begin by examining how

responsible bank originated-loan facilities and non-responsible bank originated-loan facilities.

responsible banks. In addition, we find that the improvement of borrowers’ environmental

Electronic copy available at: https://ssrn.com/abstract=4165099

issued by responsible banks rather than non-responsible banks.

mitigate information asymmetry issues as well as to avoid financial performance deterioration

Electronic copy available at: https://ssrn.com/abstract=4165099

high ESG banks or responsible banks.

of covenants. We propose two potential explanations behind the matching relationship:

country-level characteristics to account for differences in economic conditions, the degree of

2. Data and Sample Statistics

Electronic copy available at: https://ssrn.com/abstract=4165099

Electronic copy available at: https://ssrn.com/abstract=4165099

their sustainability performance and contribution to a world of sustainable transformation. In

3,500 North American companies since 2002.

Electronic copy available at: https://ssrn.com/abstract=4165099

with the summary statistics based on the firm-facility level sample.

< INSERT TABLE 1 HERE >

< INSERT TABLE 2 HERE >

Electronic copy available at: https://ssrn.com/abstract=4165099

facility-lead arranger level.

of interest and the choice of bank.

Electronic copy available at: https://ssrn.com/abstract=4165099

associated with lender ESG ratings.

with high ESG performance as well.

< INSERT TABLE 3 HERE >

Electronic copy available at: https://ssrn.com/abstract=4165099

estimate the following logistic regression:

The dependent variable 𝐻𝐻𝐻𝐻𝐻𝐻ℎ_𝐸𝐸𝐸𝐸𝐸𝐸_𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝑏𝑏𝑏𝑏 is a dummy variable indicating that the

banks. We also include borrower characteristics, lender characteristics, loan characteristics,

Electronic copy available at: https://ssrn.com/abstract=4165099

< INSERT TABLE 4 HERE >

methodology is more manipulative and subject to green-washing bias. In addition, Refinitiv

at the facility-lead arranger level.

characteristics. The coefficient on the dummy variable 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑏𝑏𝑡𝑡 is what we are

Electronic copy available at: https://ssrn.com/abstract=4165099

the membership of PRB to proxy the sustainability level of banks is reasonable.

< INSERT TABLE 5 HERE >

4. Impact of ESG rating on corporate loans spreads

following model at the facility-firm level:

coefficient on Governance rating_Firm is insignificant. To investigate whether there are

Electronic copy available at: https://ssrn.com/abstract=4165099

a 1-standard-deviation increase in borrower ESG rating is associated with a decrease of 6% of

AISD for loans issued by responsible banks. However, a 1-standard-deviation increase in

< INSERT TABLE 6 HERE >

1.621* 2.992* 1.454***