The Impact of ESG Performance on Bank Credit Decisions: A Case Study of China's Heavily Polluting Enterprises

Abstract

The central position of China's commercial banks in resource allocation determines their important role in promoting the implementation of sustainable development strategies. However, commercial banks' credit decisions in China are currently faced with problems such as a weak foundation, the lack of an effective mechanism and an imperfect organisational system. To address this issue, this study takes listed companies in China's heavy pollution industry as the research object, and finds that after the release of the Green Credit Guidelines, the ESG performance of heavy polluters has a greater impact on banks credit decisions. Heterogeneity analyses show that the ESG performance of non-state-owned, highly profitable heavy polluters has a significant impact on banks’ credit decisions. The mechanistic analysis demonstrates that the good ESG performance of heavy polluters influences bank credit decisions by lowering banks' business risk expectations and reducing banks' ex post monitoring costs. Robustness tests, including replacing independent factors, using the instrumental variable technique, comparing propensity scores, and adding potentially omitted variables, all support the conclusion. In conclusion, through clarifying the internal reasoning behind how highly polluting companies' ESG performance influences bank loan choices, this study contributes to the body of knowledge on the impact of corporate ESG performance on bank credit decisions. In addition, it serves as a guide for banks in developing acceptable credit criteria and corporate strategy decisions, which is critical for optimizing credit resource allocation and supporting high-quality, long-term economic growth.