Effects of natural disasters on lender-borrower relationship

The classical objective of firm value maximization has ceased being the most important target. What has been discussed in literature and in practice is more about sustainable value creation and the focus is not on monetary terms. The most widely referred concept is ESG (Environmental, Social, and Governance) analyses through which firms are evaluated based on the impact of their actions on the environment, society, and within their governance practices, and widely accepted as a component in financial relationships. There is a rich literature explaining the relationship between ESG score changes and loan costs (Gianetti et al., 2023; Becchetti and Manfredonia, 2022). Natural disasters have recently been introduced as a concept that can be thought of with the ESG concept. Huang et al. (2022) reveal that following a natural disaster firms tend to be more transparent while making ESG-related disclosures. In this study, we explore natural disasters and bank loan cost relationships by referring to loan spreads, and we introduce ESG profiles as a mediating metric. We use loan-level data from DealScan, natural disaster data from SHELDUS, ESG data from RepRisk, and company financial information from Compustat. Conducting a hierarchical regression model, we observe a positive significant relationship between natural disaster occurrences and loan spread increases. Introducing the RepRisk profile of firms, we try to estimate the mitigating impact of each pillar of ESG and ESG in general. We find a significant relationship between environmental, social, governance, and ESG events and loan spread increases, however, some of these relationships contradict our expectations in terms of directions.