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HomePaperFinancial Market Structure for ESG Integration

Financial Market Structure for ESG Integration

24 February 2024
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))

ESG integration is difficult to be achieved because borrowers can often deviate from their promises ex post. We find that borrowers prioritize ESG to reduce borrowing costs when their interest repayment steeply increases with financial returns. Competition between green and brown lenders could indeed lower the overall borrowing rate and induce borrowers to pursue financial profits. Nevertheless, when borrowers privately know their genuine preferences for ESG and when green lenders finance brown borrowers first, subsequent brown lenders perceive the holdout borrowers as ESG-friendly and demand a high borrowing rate. This in turn incentivizes the borrowers to minimize their borrowing costs by pursuing ESG.

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