Authors: Keeyoung Rhee (Sungkyunkwan University (SKKU)), Dongkyu Chang (City University of Hong Kong) and Aaron Yoon (Kellogg School of Management at Northwestern University)
Presenter: Keeyoung Rhee (Sungkyunkwan University (SKKU))
We explore financial market structures that incentivize firms to prioritize ESG. Borrowers may prefer reducing expected interest payments by pursuing ESG over financial profits, particularly at high borrowing rates. However, competition between ESG-friendly and non-ESG lenders lowers equilibrium borrowing rates, discouraging ESG prioritization. When firms privately know their true ESG preferences, early-moving ESG-friendly lenders can “cleanse” the ESG capital market. Specifically, non-ESG lenders perceive holdout borrowers as those with strong ESG preferences and thus charge high borrowing rates so that even non-ESG borrowers pursue ESG to reduce interest payments. Ultimately, promoting lender competition may deter rather than support ESG integration.
Authors: Quyen Nguyen (University of Otago), Ivan Diaz-Rainey (Griffith University), Adam Kitto (University of New South Wales), Nicholas Pittman (EMMI), Renzhu Zhang (University of Otago)
