ESG and Lending Risk: Why Your ESG Score May Soon Affect Your Loan Terms

As financial institutions accelerate their adoption of Environmental, Social, and Governance (ESG) frameworks, a new underwriting variable is quietly reshaping how loans are approved: the ESG score.

For privately-held businesses seeking capital, this shift has significant implications. While traditional credit risk assessments still evaluate cash flow, collateral, and credit history, many lenders are now incorporating ESG-related factors to forecast long-term business viability and risk exposure.

The Mechanism Behind the Shift

ESG scoring frameworks like MSCI, SASB, and proprietary bank models attempt to quantify a company’s adherence to sustainability, ethical governance, and social responsibility. Although these frameworks vary widely, the general thesis is the same: companies with strong ESG practices are more resilient, less prone to reputational damage, and better positioned to navigate future regulation.

As a result, businesses with higher ESG scores may receive:

• Lower interest rates due to perceived lower default risk

• Access to larger loan amounts or longer repayment terms

• Preferential treatment in competitive lending environments

Conversely, companies that ignore ESG or show poor transparency may see their borrowing power decline—or face higher financing costs.

The Private Business Disadvantage

Public companies often have dedicated compliance teams and investor mandates pushing them toward ESG disclosure. Privately-held businesses typically don’t—and that’s where risk emerges. Without proper ESG documentation, a business may appear riskier to a lender, regardless of its actual practices.

What You Can Do to Prepare:

• Conduct an ESG self-assessment to identify gaps and opportunities.

• Document ESG policies and procedures, even if they’re informal.

• Be proactive with lenders. If your ESG efforts are strong, make them visible in your loan applications.

• Start benchmarking. Choose a framework that fits your industry and begin tracking key metrics over time.

Lending is evolving. In a world where ESG is influencing everything from consumer choice to investor capital, business owners can no longer afford to treat it as optional. The next time you apply for financing, your ESG score might be just as important as your credit score.