Do banks price ESG risks? A critical review of empirical research

A lack of comprehensive reviews on whether banks price borrowers' ESG risks hinders ongoing debate on how banks could play an important role in supporting sustainability. Using a systematic literature review protocol, we performed a keywords search algorithm and selected 41 relevant articles published in peer-reviewed journals. The screening process enabled us to provide a picture of how the empirical literature examined the impact of borrowers' ESG risks on the contractual terms of bank loans. Overall, empirical research suggests that lenders penalise poor ESG performance with higher loan spread. By contrast, it is more difficult to claim that ESG strengths always create value. However, our findings reveal that all our knowledge on this topic almost exclusively concerns syndicated loans granted to large, listed, and rated companies, but which represent a minority share of bank borrowers. We identify additional significant selection bias, knowledge gaps, and critical aspect that warrant further research.