Environmental, Social, and Governance Scores and Loan Composition Inside United States Banks

Abstract

We analyze the loan portfolios of United States banks from 2013 to 2023, showing that high environmental, social, and governance (ESG) banks have larger shares of consumer loans and commercial loans and smaller shares of construction loans and real estate loans. We also find that the governance pillar (G) is more tightly related to the bank loan composition compared to the environmental (E) and social (S) pillars. Furthermore, we show that construction loans and real estate loans decrease more considerably with bank ESG scores inside countries with high gas emissions, i.e., where ESG issues would arguably be more serious. Our interpretation is that sustainable banks are reluctant in lending money for real estate projects, exposing them to potentially high ESG risk. These findings contribute to developing a deeper insight about the relationship between ESG and bank lending, which, in the previous literature, has been treated more frequently in aggregate terms instead of separating loan types. Our outcomes suggest that sustainability is crucial for the availability of funds in the real estate sector, delivering important insights to bank and real estate managers, besides policy makers.