Sustainability-Linked Loans and Borrower Selection: A Matched Event-Time Study of ESG Performance and Credit Risk among European Listed Firms

Abstract

While previous studies suggest that selection into sustainability-linked lending is largely influenced by pre-issuance borrower characteristics, it remains ambiguous whether sustainability-linked loans (SLLs) reflect borrower selection and whether their incentive structure is associated with changes in ESG performance and credit-risk characteristics. Therefore, this study uses a treatment group of 25 firms with public evidence of having obtained an SLL, and a control group of 25 firms for which no public evidence of obtaining an SLL has been found. A logit model is used to examine how pre-issuance borrower characteristics are associated with the probability of becoming an SLL borrower, while two matched panel event-time models are used to study how ESG performance and observable credit-risk characteristics develop around issuance of the loan. The thesis finds no significant evidence that ESG performance or observable credit risk determines borrower selection among SLL borrowers, which contrasts with previous research. While no differences in the development of ESG performance and observable credit-risk characteristics were found between the groups, the environmental score of SLL borrowers showed stronger signs of development than the aggregated ESG score around loan issuance.