ESG performance and loan contracting in an emerging market

ABSTRACT

In this paper, we find that better environmental, social and governmental (ESG) performance is associated with a greater magnitude of bank loans and a lower ratio of guaranteed loans in China. The relation is mainly driven by social and governmental factors while the environmental factor plays an insignificant role. Our main findings are robust to a battery of sensitivity tests, including alternative measures of ESG performance and bank-loan contracting, as well as different approaches to address potential endogeneity. Additional analysis indicates that reduced risk and increased information environment might be channels by which ESG performance affects bank-loan contracting while state ownership and the COVID-19 outbreak moderate that impact. Overall, this paper reveals that in emerging markets, the sub-dimensional ESG factors have heterogeneous impacts on loan contracting that are quite different from those found in developed markets.