Do Banks Fuel Climate Change?

Abstract

Do climate-oriented regulatory policies affect the flow of credit towards polluting corporations? We match loan-level data to firm-level greenhouse gas emissions to assess the impact of the Paris Agreement. We find that, following this agreement, European banks reallocated credit away from polluting firms. In the aftermath of President Trump's 2017 announcement that the United States was withdrawing from the Paris Agreement, lending by European banks to polluting firms in the United States decreased even further in relative terms. It follows that green regulatory initiatives in banking can have a significant impact combating climate change.

Does Climate Change Affect Bank Lending Behavior?

“…In other words, banks have become more hesitant in extending credits to localities causing prominent externalities to the environment. This finding is in line with the prior literature showing that climate risks increasingly interact with the organizational decisions and policies of banks (Nguyen et al, 2020;Javadi and Masum, 2021;Reghezza et al, 2021).…”

“…A growing body of research shows that climate change poses severe risks to the financial system (Nguyen et al, 2020;Javadi and Masum, 2021;Reghezza et al, 2021). Investors are increasingly viewing such risks as being already relevant and having a high potential to materialize (Ilhan et al, 2021a).…”

“…carbon emissions data (Kacperczyk and Peydró, 2021;Reghezza et al, 2021;Mueller and Sfrappini, 2022). Our study takes a more holistic approach by investigating how direct exposure to air pollution affects bank lending behavior after controlling the variables related to regional loan demand and bank characteristics.…”

Over With Carbon? Investors’ Reaction to the Paris Agreement and the US Withdrawal

“…Finally, Reghezza et al (2021) study the impact of the PA and the US withdrawal on bank lending. They find that, after the PA, European banks reallocated credit away from polluting firms, whereas in the aftermath of the US announcement, lending by European banks to polluting firms in the US further decreased.…”

The Color of Corporate Loan Securitization

“…Recent evidence suggests that banks incorporate transition risk into their loan pricing: Firms with higher carbon emissions or fossil fuel reserves pay higher interest rates while firms that disclose environmental information receive more favorable terms (Chava, 2014;Degryse et al, 2021;Delis et al, 2021). Furthermore, banks seem to account for transition risk in their loan volumes (Kacperczyk and Peydró, 2021;Mueller and Sfrappini, 2022;Reghezza et al, 2022). Mueller and Sfrappini (2022) show that banks lend more to firms that are likely to benefit from the introduction of environmental regulations while Kacperczyk and Peydró (2021) find that firms with high carbon emissions receive less funding after banks committed to lending sustainable.…”