Evidence on Whether Banks Consider Carbon Risk in Their Lending Decisions

Kathleen Herbohn (), Ru Gao () and Peter Clarkson ()
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Kathleen Herbohn: The University of Queensland
Ru Gao: The University of Queensland
Peter Clarkson: The University of Queensland

Journal of Business Ethics, 2019, vol. 158, issue 1, No 9, 155-175

Abstract: Abstract Banks face a dilemma in choosing between maximising profits and facilitating the sustainable use of resources within a carbon-constrained future. This study provides empirical evidence on this dilemma, investigating whether a bank loan announcement for a firm with high carbon risk conveys information to investors about the firm’s carbon risk exposure collected through a bank’s pre-loan screening and ongoing monitoring. We use a sample of 120 bank loan announcements for ASX-listed firms over the period 2009–2015. We measure high (low) carbon risk exposure based on whether firms meet (do not meet) the reporting threshold of the NGER scheme. We document positive and significant excess loan announcement returns for loan renewals for high carbon risk firms, but not for loan initiations. Further, we document a more significant loan announcement return for renewals with favourable term revisions. Finally, we find no evidence that the market differentiates between domestic and foreign lenders. Taken together, our results suggest that investors perceive that banks incorporate carbon risk considerations into their lending decisions. Our results highlight the value of banks as financial intermediaries given the information asymmetry surrounding firms’ carbon risk exposure, and more generally the need to extend modern banking theory to consider issues such as the impact of banks’ CSR reputation on lending decisions.

Keywords: Carbon risk; Banks; Bank monitoring; Carbon emissions (search for similar items in EconPapers)
JEL-codes: G14 Q51 Q54 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (45)

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DOI: 10.1007/s10551-017-3711-3

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