BIS Paper Examines Impact of Greenhouse Gas Emissions on Lending
BIS issued a paper that investigates the effect of the greenhouse gas, or GHG, emissions of firms on bank loans using bank–firm matched data of Japanese listed firms from 2006 to 2018. It also examines whether the relationship between bank loans and greenhouse gas emissions varies depending on the financial soundness of lending banks.
The previous literature suggests that climate risks as priced into corporate bonds or syndicated loans are statistically significant but economically not of great importance. However, this paper investigates bank lending behavior in terms of the loan amount, which is considered to have a more direct effect on firm investment decisions. The paper investigates how bank behavior changed before and after the Paris Agreement. Using the loan-level data from 2006 to 2018, the paper finds that bank lending to firms with higher greenhouse gas emissions has significantly decreased. Moreover, this effect appears to have prevailed even before the signing of the Paris Agreement, which the existing literature considers as the starting point where greenhouse gas emissions are incorporated in the pricing of debt instruments as credit risk. Finally, loans from banks with greater leverage and a lower return on assets to high greenhouse gas emitters are more likely to decrease. Overall, these findings suggest that it is supply-side factors that primarily drive the effect of greenhouse gas emissions on bank lending.
The effect of greenhouse gas emissions on loans is larger for loans from banks with high leverage and low profitability, which implies that lending banks consider high greenhouse gas emissions as being associated with higher future credit costs. Higher level and intensity of greenhouse gas emissions are not associated with weak demand for capital expenditure or working capital, instead firms with high greenhouse gas emissions have greater credit demand for capital expenditure. The study finds that reputation risk would not be a main driving factor for the effect of greenhouse gas emissions on lending. Moreover, banks are more sensitive to the greenhouse gas emissions of borrowing firms with low credit risk, suggesting that the greenhouse gas emission effect is driven by the banks’ view that high greenhouse gas emissions imply high credit risk in the longer term. These results have some policy implications. Lending behavior to brown firms significantly varies across banks. This implies that when a new policy related to green finance is introduced, it is likely to affect the lending behavior of banks heterogeneously.
Keywords: International, Banking, Lending, Paris Agreement, ESG, Credit Risk, Sustainable Finance, GHG Emissions, BIS
Credit analytics expert helping clients understand, develop, and implement credit models for origination, monitoring, and regulatory reporting.
Previous ArticleBCBS Report Examines Impact of Basel III Framework for Banks
BOE Sets Out Its Thinking on Regulatory Capital and Climate Risks
The Bank of England (BOE) published a working paper that aims to understand the climate-related disclosures of UK financial institutions.
OSFI Finalizes on Climate Risk Guideline, Issues Other Updates
The Office of the Superintendent of Financial Institutions (OSFI) is seeking comments, until May 31, 2023, on the draft guideline on culture and behavior risk, with final guideline expected by the end of 2023.
HMT Mulls Alignment of Ring-Fencing and Resolution Regimes for Banks
The HM Treasury (HMT) is seeking evidence, until May 07, 2023, on practicalities of aligning the ring-fencing and the banking resolution regimes for banks.
BCBS Report Examines Impact of Basel III Framework for Banks
The Basel Committee on Banking Supervision (BCBS) published results of the Basel III monitoring exercise based on the June 30, 2022 data.
PRA Consults on Prudential Rules for "Simpler-Regime" Firms
Among the recent regulatory updates from UK authorities, a key development is the first-phase consultation, from the Prudential Regulation Authority (PRA), on simplifications to the prudential framework that would apply to the simpler-regime firms.
DNB Publishes Multiple Reporting Updates for Banks
DNB, the central bank of Netherlands, updated the list of additional reporting requests and published additional data quality checks and XBRL-Formula linkbase documents for the first quarter of 2023.
NBB Sets Out Climate Risk Expectations, Issues Reporting Updates
The National Bank of Belgium (NBB) published a communication on climate-related and environmental risks, issued an update on XBRL reporting
EBA Updates Address Securitization Standards and DGS Guidelines
The European Banking Authority (EBA) published the final draft of the regulatory technical standards that set out conditions for assessment of homogeneity of the underlying exposures in simple, transparent, and standardized (STS) securitizations.
FSB Publishes Letter to G20, Sets Out Work Priorities for 2023
The Financial Stability Board (FSB) published a letter intended for the G20 Finance Ministers and Central Bank Governors, highlighting the work that FSB will take forward under the Indian G20 Presidency in 2023
ISSB Standards May Become Effective from January 2024
The International Organization of Securities Commissions (IOSCO) welcomed the confirmation statement by the International Sustainability Standards Board (ISSB) setting out its progress in the development of its first sustainability-related corporate disclosure standards.