Bank's funding costs: Do ESG factors really matter?

This study analyzes whether environmental, social and governance (ESG) factors affect the pricing of bank bonds in the primary market. Using a unique dataset of 19,106 fixed-rate senior bonds issued by a sample of 63 EU banks between 2006 and 2021, we find that, ceteris paribus, the cost at issuance is lower for banks with higher ESG scores. Interestingly, the results are not driven by the environmental friendliness of the issuer, but rather by high corporate governance standards and ESG reporting and transparency practices. Our results shed light on the effect of ESG practices on the cost of debt funding in the banking sector, and show a positive role of “sustainable” banking governance practices in reducing the cost of debt financing.