Evidence on Whether Banks Consider Carbon Risk in Their Lending Decisions

Original Paper
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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 

JEL Classification

G14 Q51 Q54 

Notes

Acknowledgements

We are grateful for the financial support provided by CPA Australia via a 2016 Global Perspectives Research Grant (Grant No. 001/2016). We also thank Kevin Thai and Pei-Jia Lum for their excellent research assistance.

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Copyright information

© Springer Science+Business Media B.V. 2017

Authors and Affiliations

  1. 1.UQ Business SchoolThe University of QueenslandSt LuciaAustralia
  2. 2.Beedie School of BusinessSimon Fraser UniversityBurnabyCanada

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