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Firm ESG Practices and the Terms of Bank Lending

In: Sustainable Finance and ESG

Author

Listed:
  • Mingying Cheng

    (Fordham University)

  • Iftekhar Hasan

    (Fordham University
    Bank of Finland
    University of Sydney)

Abstract

Banks recognize environmental, social, and governance (ESG) risks as relevant factors in loan contracts since a growing number of such concerns threaten financial stability. We trace this literature focusing on interactions between borrowers’ ESG practices and their banking relationships. We analyze underlying theories why banks change their lending terms contingent on borrowers’ ESG profiles followed by exploring the channels through which firms’ ESG activities affect bank lending decisions, including loan interest rates, maturity, and collateral requirements. We also discuss how banks may affect borrowers’ ESG policies and investment via lending relationships. Finally, we provide new empirical evidence to show that banks’ ESG risks become more value-relevant in the capital market over time. We contribute to the literature by investigating the learning process between banks and borrowers, specifically showing that banks do learn by observing the ESG behaviors of responsible borrowers and consequently improve their own ESG scores.

Suggested Citation

  • Mingying Cheng & Iftekhar Hasan, 2023. "Firm ESG Practices and the Terms of Bank Lending," Palgrave Macmillan Studies in Banking and Financial Institutions, in: Chrysovalantis Gaganis & Fotios Pasiouras & Menelaos Tasiou & Constantin Zopounidis (ed.), Sustainable Finance and ESG, pages 91-124, Palgrave Macmillan.
    • Handle: RePEc:pal:pmschp:978-3-031-24283-0_5
    DOI: 10.1007/978-3-031-24283-0_5
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    More about this item

    Keywords

    ESG; Banking; Responsible bank lending;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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