Environmental performance and bank lending: Evidence from unlisted firms

Abstract

Growing public concerns about sustainability and adopting environmentally responsible practices increase risks as well as opportunities for firms and banks. It is unclear whether being environmentally responsible matters for unlisted firms, which are significant contributors to the degradation of the environment but which are not under strict scrutiny like public listed firms. Using a sample of 3915 firms from developing economies, we investigate whether the superior environmental performance of unlisted firms leads them to better loan conditions. After controlling for endogeneity and sample selection bias, we find that firms with better environmental performance received approximately 6.4% higher loans (as a ratio of total sales) and that this effect is more prominent in small and medium firms. This finding supports an information asymmetry view of agency costs. Our results, however, show that environmental performance does not affect loan duration and collateral requirement, indicating no spillover economic effect of corporate environmental performance on loan conditions. This partially supports a new perspective of legitimacy theory in relation to the 'greenwash strategy'. Overall, our study shows that strategically engaged environmental activities that are integrated with core business objectives represent an important business strategy for firms to enhance credit access.

Is there a trade‐off between environmental performance and financial sustainability in microfinance institutions? Evidence from South and Southeast Asia

“…To obtain the aggregate environmental performance measure, we add all positive responses and divide by the total number of attributes. This is consistent with the literature, in which an additive index is constructed from a set of individual indicators (Aggarwal et al, 2009; Gupta, 2018; Wellalage & Kumar, 2021).…”

Are environmentally friendly firms more vulnerable during the COVID-19 pandemic?

“…The control function approach needs instrumental variables for identification. We follow Wellalage and Kumar (2021) and use the locality-industry average of environmental performance as an instrument of firm-level environmental performance. The test results indicate the rejection of the endogeneity at the above 0.10 level of significance.…”

“…Better environmental performance and environmental disclosure overcome information asymmetry hence addressing the agent problem due to increased transparency. The positive impact of environmental performance on access to finance and the costs of debt is well documented in the literature (e.g., Wellalage and Kumar, 2021 ; Zhang, 2021 ). Additionally, environmental investment is seen as a future investment and may affect human capital and business competition ( Yang et al, 2019 ).…”

Environmental performance and firm financing during COVID-19 outbreaks: Evidence from SMEs

“…The performance of firms with respect to corporate social responsibility (CSR) has been a topic of interest for both researchers and policymakers (see Bruna and Nicolò, 2020 ; Lahouel et al., 2020 ). In particular, the environmental performance of firms is one of the vital factors that affect lending decisions ( Wellalage and Kumar, 2021 ) and conditions of lending ( Goss and Roberts, 2011 ). Firms that display proactive environmental practices are seen to carry a lower level of risk ( Godfrey et al., 2009 ), accessibility to the financial market ( Jo and Na, 2012 ; Farza et al., 2021 ) and greater leverage ( Sharfman and Fernando, 2008 ).…”