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.
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Keywords: International, Banking, Lending, Paris Agreement, ESG, Credit Risk, Sustainable Finance, GHG Emissions, BIS
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