The Bank for International Settlements (BIS) released a working paper, March 2023, that examines the impact of greenhouse gas (GHG) emissions of companies on bank loans and subsequent investment decisions. The paper uses data from Japanese listed firms between 2006 and 2018 and challenges prior findings that suggested climate change risks were economically insignificant.
Key findings from the paper include:
- Banks reduced loans to companies with higher GHG emissions significantly.
- The influence of GHG emissions on bank financing predates the 2015 Paris Agreement, contradicting previous literature.
- Banks with higher leverage and lower profitability were more likely to decrease loans to high GHG-emitting firms, indicating that banks associate high emissions with higher future credit risks.
- Banks were more sensitive to GHG emissions from low-credit-risk borrowers, implying that they view high emissions as a sign of long-term credit risk.
The paper also discusses how banks have shown interest in understanding the environmental consequences of their lending, possibly influenced by the introduction of “Green operations” by the Bank of Japan in 2021. It suggests that the introduction of new policies related to green finance may impact banks’ lending behavior differently.
This research is a good start, but it could be expanded in the future to include lending to small and medium-sized enterprises (SMEs) and encompass banking sectors in other countries.
The challenge remains in whether banks can access real GHG emissions data or must rely on proxies and assumptions for decision-making. Despite its limitations, the working paper provides valuable insights and prompts further consideration of these important issues.
Source: Bank of International Settlements (BIS)
