 Can sustainability-linked lending reconcile environmental and financial motives?Ammu George, Jingong Huang, He Nie and Taojun Xie International Review of Financial Analysis, 2025, vol. 104, issue PB Abstract: Differentiated lending terms for clean and dirty capital have become a popular tool among commercial banks as they promote themselves as advocates of environmental sustainability. Using a two-sector New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model where emissions are a by-product of dirty capital, we incorporate an interest spread responding elastically to carbon emissions: Banks offer lower lending rates to clean capital investment agencies when emission growth exceeds a target level. We find that while banks’ offering emission-elastic lending rate (EELR) is consistent with the regulator’s welfare objective, there is a tendency for banks to overreact to carbon emissions, resulting in increased loan volume, and thus, uncertainties in the financial sector. Although EELR faces more financial sector uncertainty, it outperforms Green Capital Requirements (GCR) in lowering the economic risk associated with the green transition. Keywords: Climate policy; Monetary policy; New keynesian model; Bank lending; Macroprudential policy; Green finance (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:104:y:2025:i:pb:s1057521925004041 DOI: 10.1016/j.irfa.2025.104317 Access Statistics for this article International Review of Financial Analysis is currently edited by B.M. Lucey More articles in International Review of Financial Analysis from Elsevier |
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