How do borrower ESG performance and risks matter to banks?

Abstract

We examine how two distinct Environmental, social and governance (ESG) measures—disclosure-based ESG performance and event-driven ESG risks—affect the cost of bank loans. Using an international sample, we find that borrowers with higher ESG risks face significantly higher loan spreads, while stronger ESG performance is associated with lower spreads. The cost-saving effect of ESG performance depends on ESG risk but not vice versa. Our analysis suggests that these relationships operate through mitigating information asymmetry and signalling borrower quality. Furthermore, matching between lenders' and borrowers' ESG profiles moderates banks’ pricing strategies, particularly in the risk dimension: ESG-aligned borrower–lender pairs are more likely to form lending relationships and secure loans at lower spreads. These findings provide new evidence on the pricing of different ESG dimensions in the loan market and highlight the role of lender–borrower ESG compatibility in shaping credit terms.