Do Banks Value Borrowers' Environmental Record? Evidence from Financial Contracts
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ORIGINAL PAPER
Do Banks Value Borrowers’ Environmental Record? Evidence from Financial Contracts I‑Ju Chen1 · Iftekhar Hasan2 · Chih‑Yung Lin3 · Tra Ngoc Vy Nguyen4 Received: 8 July 2019 / Accepted: 11 September 2020 © Springer Nature B.V. 2020
Abstract Banks play a unique role in society. They not only maximize profits but also consider the interests of stakeholders. We investigate whether banks consider firms’ pollution records in their lending decisions. The evidence shows that banks offer significantly higher loan spreads, higher total borrowing costs, shorter loan maturities, and greater collateral to firms with higher levels of chemical pollution. The costly effects are stronger for borrowers with greater risk and weaker corporate governance. Further, the results show that banks with higher social responsibility account for their borrowers’ environmental performance and charge higher loan spreads to those with poor performance. These results support the idea that banks with higher social responsibility can promote the practice of business ethics in firms. Keywords Chemical emissions · Pollution record · Bank sustainability performance · Corporate governance · Business ethics
Introduction
Tra Ngoc Vy Nguyen [email protected]
society’s resources and a delegated monitor of loan borrowers (Diamond 1984; Gao et al. 2017; Herbohn et al. 2019). They use their expertise in to screen prospective borrowers, monitor them, and to ensure they repay the banks. Facing rapid and extreme climate change around the world, many banks have made commitments to integrate social and environmental considerations into their operations and financing decisions (Scholtens and Dam 2007; Cogan 2008; Scholtens 2009; Goss and Roberts 2011).1 For example, since the early 2000s, banks have increasingly adopted the Equator Principles when financing projects (Jung, Herbohn, and Clarkson 2018).2 Banks have also renewed loan contracts with favorable terms that have provided lenders with greater access to inside information about high-risk carbon firms (Herbohn et al. 2019), or they have offered lower loan costs to firms with superior performance in corporate social responsibility (Cheung et al. 2018). In addition,
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Banks play a unique role in society. On the one hand, they maximize profits for their shareholders. On the other hand, they allocate resources and funds to firms that support their operating strategy and contribute to their economic development (Levine 2005; Scholtens 2009). As most funds are sourced from depositors, banks serve as a custodian of * Iftekhar Hasan [email protected] I‑Ju Chen [email protected] Chih‑Yung Lin [email protected]
College of Management, Yuan Ze University, Taoyuan, Taiwan
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Fordham University, Bank of Finland and University of Sydney, 45 Columbus Avenue, 5th Floor, New York, NY 10023, USA
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Department of Information Management and Finance, National Chiao-Tung University, Hsinchu, Taiwan
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Faculty of Economics and Accounting, Quy Nhon University, Quy Nhon, Vietnam
Accor
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