Do Borrowers Benefit from Sustainability-Linked Loans? An analysis of explicit ESG information in loan contracts and borrowers’ incentives to enter sustainability-linked loans

Abstract

This thesis examines the explicit use of ESG information in loan contracts and borrowers' incentives to enter sustainability-linked loans (SLLs). We explore whether shareholders respond to announcements of sustainability-linked loan issuances andwhether companies with sustainability-linked loans experience a higher ESG score and performance on contractual KPis after entering the loan contract. We also investigate if there is a sustainability-linked premium around loan issuance. We perform this analysis by comparing a sample of sustainability-linked loans from 2017 to 2019 to a matched sample of comparable traditional loans from Bloomberg Terminal. We find that shareholders respond positively to announcements of sustainability-linked loan issuances. Borrowers with better disclosure quality contracts receive a more significant response than borrowers with poor disclosure quality contracts, implying that investors value transparency and are vigilant about greenwashing concerns. We conclude that loan spreads are higher for SLLs at issuance; hence, financial discounts are unlikely to drive the observed stock market reaction. There are no significant indications of improved ESG performance between the borrowers of sustainability-linked and traditional loans. Thus, using explicit ESG information in loan contracts does not seem to affect sustainability performance. However, borrowers with good ESG profiles seem to self-select into sustainability-linked loans. Our findings suggest that the borrowers enter sustainability-linked loan contracts to signal ESG commitment, and their shareholders seem to value this choice.