Introduction

James Gifford, Executive Director, PRI

This new publication aims to bring you regular highlights of academic research relevant to responsible investment and the impact of environmental, social and corporate governance issues on investment strategies. This issue focuses on the impact of social and governance factors on corporate bank loans, a growing area of interest, but one that has received much less attention than the impact of ESG on equity risk and returns.

Banks occupy a privileged position in the finance world, gaining access to financial information about their borrowers that public debt or equity holders do not have, and with the ability to impose terms and conditions as they see fit. Consequently their decisions on which companies are creditworthy and the factors that influence their decisions has great significance for other stakeholders, not only in terms of the direct impact on the company finances, but also the potential implications for subsequent company performance.

The five academic reviews included herein summarise the influence of a variety of intangible factors on the cost of bank debt for companies: board structure, shareholder rights, corporate social responsibility, cultural differences and management’s personal connections. The research covers different time horizons and both global and USfocused data sets, but all find evidence that intangible factors have an impact on pricing when companies arrange bank loans. They all also tackle the problem of how to evaluate subjective and disparate qualitative data, an often cited difficulty in incorporating ESG issues into investment decisions. This publication can therefore offer insights into how these factors could be incorporated into an investment strategy in addition to demonstrating their relevance for company returns.

The papers referenced here are not the only research on ESG issues in bank loan pricing, but represent five robustly researched and diverse perspectives on the theme. If you find the topic and the research interesting, we hope that you will share it with your colleagues and peers.