The Paradox of Sustainable Finance: Evaluating the Empirical Impact of U.S. Green Lending Policies on Corporate Borrowing Costs and the Mitigation of Commercial Credit Risk

• Sunday Sunday

  Ladoke Akintola University of Technology

  Author

The integration of environmental criteria into commercial lending decisions presents a fundamental paradox: while green lending policies aim to incentivize sustainable corporate behavior through preferential borrowing terms, their actual impact on credit risk mitigation and borrowing costs remains empirically contested. This study investigates the relationship between U.S. green lending policies, corporate borrowing costs, and commercial credit risk through a quantitative analysis of syndicated loan data from 2011 to 2023. Drawing on a theoretical framework combining adverse selection theory with environmental signaling mechanisms, we examine whether green borrower designation correlates with reduced loan spreads and whether such preferential pricing genuinely reflects lower credit risk. Our empirical analysis, employing difference-in-differences estimation and panel regression techniques, reveals that green-certified firms obtain average loan spread reductions of 18-23 basis points compared to non-green counterparts, with the effect intensifying following the 2015 Paris Agreement. However, we identify a critical paradox: green borrowers do not exhibit statistically significant improvements in traditional credit risk metrics, with default probabilities differing by only 1.2% (p=0.18) between green and brown firms. This suggests that green lending discounts may reflect lender preference rather than risk-based pricing, raising concerns about the efficiency of sustainability-linked credit allocation. The study contributes to sustainable finance literature by empirically documenting the decoupling of environmental signaling from credit risk fundamentals and offers practical recommendations for aligning green lending policies with robust risk assessment frameworks.

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