Does Monetary Policy Condition the ESG–Bank-Lending Relationship? Evidence from U.S. and European Banks

This study examines whether the relationship between banks’ environmental, social, and governance (ESG) performance and loan growth varies with monetary-policy conditions. Using an annual panel of listed U.S. and European banks over 2016–2025, we combine bank-level ESG and financial data with central-bank policy-rate data. Bank and year fixed-effects models relate one-year-lagged ESG performance to subsequent loan growth and interact ESG with changes in policy rates. Higher ESG performance is positively associated with subsequent loan growth, but this association weakens as policy-rate changes increase. Consistently, the positive ESG–loan-growth association observed during non-tightening periods becomes economically small and statistically insignificant during monetary tightening. The negative ESG–policy interaction extends across the environmental, social, and governance pillars and remains significant under alternative monetary-policy measures and timing, dynamic specifications, and several treatments of monetary-area-time dependence. However, the interaction becomes substantially smaller and statistically insignificant when monetary-area-by-year fixed effects are absorbed. Overall, the findings identify monetary-policy conditions as an important boundary condition in the ESG–bank-lending relationship while supporting a conditional rather than causal interpretation.