This paper examines the environmental, social, and governance (ESG) loan market, which has grown from $6 billion in 2016 to $322 billion in 2021. This growth is driven primarily by ESG-linked loans where loan spreads are contingent on borrower ESG performance, as well as by use-of-proceeds based green loans issued for specific green projects. ESG-linked loans are issued mostly by large and publicly traded firms with superior ESG profiles. These loans are often structured as revolving credit facilities and syndicated by dominant global banks with good ESG profiles and pre-existing lending relationships with borrowers. Green loans, on the other hand, are mostly issued to privately held borrowers by non-relationship lenders. ESG loan borrowers enjoy a net pricing advantage, suggesting better ESG profiles reduce credit risk or that lenders value being associated with ESG loans. We find that ESG-linked loans are opaque and vary widely in the extent of their contractual disclosures. Consistent with greenwashing, borrowers with low quality disclosures about ESG contract features experience deterioration in ESG scores after loan issuance. Borrowers with high quality disclosures continue to maintain good ESG profiles and stock markets react positively to such loan announcements. Overall, our results indicate market vigilance against potential greenwashing and suggest that as the market matures, the ESG loan market has potential to make a positive impact on corporate ESG performance.

Keywords: ESG, ESG Loans, ESG Lending, Sustainable Finance, Bank Lending

JEL classifications: G21, G32, M14​