Firm ESG Performance in the Private Debt Market: Empirical Evidence from the European Syndicated Loan Market in the 2002-2021 Time Frame

Marco Cominotti & Maddalena Franzini

Student thesis: Master thesis


This paper investigates the relationships between firm environmental, social and governance (ESG) performance and certain loan contract terms (loan spread, number of lenders, loan amount, loan maturity, likelihood of covenants, likelihood of collateral) in the European private debt market. This is done by performing Ordinary Least Squares (OLS) pooled regressions on a sample of syndicated loans issued from 2002 to 2021. The sample includes 1,009 loans issued to 280 European borrowers by 38 European lenders, among which 28 banks. We find evidence on the partial effect of ESG performance on loan contract terms, on the moderating role of country sustainability in the relationships and on the way ESG performance acts as a signal of trustworthiness and as an instrument for firms to earn trust in times of crisis. ESG performance is rewarded with lower loan spreads when borrowers perform above the average in terms of sustainability, while the same cannot be said for borrowers performing below-average. Also, the relationship of ESG performance with the loan contract terms suggests that above-average borrowers are those benefiting the most from the risk- reducing effects of ESG investments. Country sustainability moderates the relationship with loan spread from 2009 to 2015. Indeed, in that time frame lenders perceive ESG performance to mitigate credit risk to a larger extent when the borrower is headquartered in a country where sustainability is valued. The extent to which ESG performance acts as a signal of trustworthiness is also contingent on country ESG performance. In this respect, lenders associate ESG engagement with trustworthiness after the global financial crisis, reflecting this assessment into lower loan spread, higher tranche amount and more lenders involved in the syndicate, only when the borrower is headquartered in a country which pays attention to sustainability issues. ESG also helps firms earn trust in the private debt market, being associated with larger loan amounts during crisis times, if the borrower performs above the average. Overall, our work extends previous analyses on the effect of ESG performance on the cost of debt to the European private debt market and complements those with further insights on the ESG performance-loan contract terms relationships.

EducationsMSc in Advanced Economics and Finance, (Graduate Programme) Final Thesis
Publication date2022
Number of pages138
SupervisorsKristian Miltersen & Ramona Westermann