Do banks price environmental risk? Only when local beliefs are binding!

Irem Erten and Steven Ongena

No 18664, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We study the impact of environmental footprint on the cost of bank credit. We document that at loan origination and controlling for the borrower fundamentals and non-price deal characteristics, especially weakly capitalized lenders charge higher rates to borrowers with a higher impact on the environment. This environmental rate sensitivity however is not driven by local biodiversity risk but is focused on those borrowers of the same lender that are located in states where climate denial is low. Using the surprise withdrawal of Trump from the Paris Agreement, we also show that this deregulation led banks to reduce their environmental risk sensitivity of their loan pricing in those areas that did not sue the government for this withdrawal and in Republican states. Our paper suggests that the price of environmental risk in bank lending is driven by local beliefs and regulatory enforcement.

Date: 2023-12
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Working Paper: Do Banks Price Environmental Risk? Only When Local Beliefs are Binding! (2024)
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