Greenhouse gas emissions and bank lending

Summary

Focus 

Using more than 10 years of loan data for individual Japanese listed firms and banks, we investigate whether the greenhouse gas (GHG) emissions of borrowing firms have affected bank lending to these firms. In particular, we focus on the varied behaviour across banks with different financial characteristics. In addition, we examine why the GHG emissions of firms may influence bank lending to these firms.

Contribution 

The previous literature suggests that climate risks as priced into corporate bonds or syndicated loans are statistically significant but economically not of great importance. This paper investigates bank lending behaviour in terms of the loan amount, which we consider to have a more direct effect on firm investment decisions. Moreover, the existing literature considers the Paris agreement as the starting point for the incorporation of GHG emissions into the pricing of debt instruments as a form of credit risk. However, the GHG emissions effect may have been felt even before Japan ratified the Paris Agreement in 2016, since energy efficiency was a central issue in the Japanese economy even before this point. This paper investigates how banks' behaviour changed before and after the Paris agreement.

Findings 

Using the loan-level data from 2006 to 2018, this paper finds that bank lending to firms with higher GHG emissions has significantly decreased. Moreover, this effect appears to have prevailed even before the signing of the Paris Agreement. Finally, loans from banks with greater leverage and a lower return on assets to high GHG emitters are more likely to decrease. Overall, these findings suggest that it is supply side factors that primarily drive the effect of GHG emissions on bank lending.

Abstract

This paper investigates the effect of the greenhouse gas (GHG) emissions of firms on bank loans using bank–firm matched data of Japanese listed firms from 2006 to 2018. Previous findings suggest that climate risks priced in corporate bonds or syndicated loans are statistically significant but economically minor. This paper investigates bank lending behavior in terms of the loan amount, which we consider to have a more direct effect on firm investment decisions. This paper finds that banks significantly decrease loans to firms with higher GHG emissions. Moreover, this GHG emissions effect appears to have prevailed even before the signing of the Paris Agreement, which the existing literature considers as the starting point where GHG emissions are incorporated in the pricing of debt instruments as credit risk. Finally, banks with greater leverage and a lower return on assets are more likely to decrease loans to firms with high GHG emissions.

JEL Classification: E51, G21, Q54

Keywords: greenhouse gas, bank lending, leverage, loan-level data