Financing sustainability: Sustainable institutional investors and bank loan access

• We explored how sustainable investor ownership affects the bank loans received by firms. • Sustainable institutional investors help portfolio firms gain better access to the loan market. • The influence is attributable to improved ESG credibility and reduced conflicts of interest. • Firms held by sustainable institutional investors rely less on tightly monitored loans to improve sustainability. • Securing loans helps those firms to reduce carbon emissions. This study examines the role of sustainable institutional investors in enhancing portfolio firms’ access to bank loans. Utilising the Principles for Responsible Investment (PRI) signatory status as a marker of commitment to responsible investing, we find that being held by these responsible investors not only enables firms to borrow more but also at a lower cost. Further analysis shows that the advantages in loan market access are due to the presence of sustainable institutional investors serving as a signal of the credibility of firms’ ESG profiles, which aligns long-term growth goals and reduces shareholder-creditor conflicts. Being held by sustainable institutional investors also allows firms to avoid green and sustainability-linked loans that, whilst supporting their ESG development, require stricter monitoring than conventional loans. Additionally, we document that the negative relationship between sustainable investors and carbon emissions is more pronounced for firms that have obtained loans compared to those without. Overall, this study highlights the importance of financing support for sustainable institutional investors in fulfilling sustainability commitments and highlights the synergy between different financial markets in curbing carbon emissions.