Do Banks Price Environmental Risk? Only When Local Beliefs are Binding!

Irem Erten and Steven Ongena
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Irem Erten: University of Warwick - Warwick Business School

No 24-40, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: We study the impact of the environmental footprint and the biodiversity risk exposure of firms on their cost of bank credit. We document that at loan origination banks charge higher rates to firms with more environmental damage, especially when weakly capitalized and when the firms operate in "greener" states with low denial and during periods with more negative environmental news. Biodiversity risk is also priced, and more so when public interest intensifies. Following the Trump withdrawal from Paris, banks reduce environmental risk pricing in "browner" states. In sum, environmental risk pricing in bank lending is also driven by local beliefs and attitudes.

Keywords: Climate change; biodiversity risk; bank credit; personal beliefs (search for similar items in EconPapers)
JEL-codes: G12 G18 G21 (search for similar items in EconPapers)
Pages: 62 pages
Date: 2024-08
New Economics Papers: this item is included in nep-fmk and nep-res
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Working Paper: Do banks price environmental risk? Only when local beliefs are binding! (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp2440

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