ESG Risk, Political Ideology, and the Syndicated Lending Relationship

This study examines how Environmental, Social, and Governance (ESG) scores affect both the matching process between borrowers and lenders and the terms of syndicated loans. The analysis concentrates on a comprehensive sample of syndicated loans to US firms. We estimate a set of linear models relating the borrower's ESG ratings to the bank's ESG ratings and to the loan conditions. We find that firms with higher ESG scores are more likely to secure loans from banks that also have strong ESG ratings, especially in politically liberal states. Such firms also benefit from more favorable loan terms, including lower interest rates and a reduced number covenants. This study highlights the dual role of ESG in influencing both borrower-lender matching and loan contracting outcomes. It also demonstrates that local political ideology amplifies the alignment between borrowers and lenders in terms of ESG, as well as the pricing of ESG ratings in loan contracting.