Evidence on Whether Banks Consider Carbon Risk in Their Lending Decisions
- 222 Downloads
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.
KeywordsCarbon risk Banks Bank monitoring Carbon emissions
JEL ClassificationG14 Q51 Q54
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.
- Ackerman, A. (2014). Banks feel heat on climate-change issue, Wall Street Journal. Retrieved from http://www.wsj.com/articles/SB10001424052702304851104579363201070023722.
- Anonymous. (2016). Adani coalmine: ANZ chief suggests bank would not finance Carmichael project, The Guardian. Retrieved from https://www.theguardian.com/business/2016/dec/17/adani-coalmine-anz-chief-suggests-bank-would-not-finance-carmichael-project.
- Chen, L. H., & Gao, L. S. (2012). The pricing of climate risk. Journal of Financial and Economic Practice, 12(2), 115–131.Google Scholar
- Climate Institute. (2015). Australia’s financial system and climate risk. Discussion Paper, July 2015. Retrieved from http://www.climateinstitute.org.au/articles/media-releases/new-analysis-australias-financial-system-and-climate-risk.html.
- Cogan, D., Good, M., & McAteer, E. (2008). Corporate governance and climate change: The banking sector. Ceres. Retrieved from http://www.ceres.org/resources/reports/corporate-governance-banking-sector.
- Commonwealth of Australia. (2010). National greenhouse and energy reporting guidelines. Canberra: Department of Climate Change. Retrieved from https://www.environment.gov.au/climate-change/greenhouse-gas-measurement/nger.
- Deutsche Bank. (2009). Australian carbon pollution reduction scheme: De-carbonising the CPRS, Sydney, 23 October.Google Scholar
- Freixas, X., & Robert, J. C. (1998). Microeconomics of banking. Cambridge, MA: MIT Press.Google Scholar
- Gujarati, D. N. (2004). Basic econometrics (4th ed.). New York, NY: McGraw-Hill.Google Scholar
- Hair, J. F., Anderson, R. E., Tatham, R. L., & Black, W. C. (1998). Multivariate data analysis (5th ed.). Upper Saddle River, NJ: Prentice-Hall International.Google Scholar
- IEA (International Energy Agency). (2006). World energy outlook 2006. Paris: IEA.Google Scholar
- Kauffmann, C., Tebar, L., & Teichmann, D. (2012). Corporate greenhouse gas emission reporting: A stocktaking of government schemes. 2012/01, OECD Publishing, Retrieved from doi: 10.1787/5k97g3x674lq-en.
- KPMG. (2015). Currents of change: The KPMG survey of corporate responsibility reporting 2015. Retrieved from http://www.kpmg.com/crreporting.
- Labatt, S., & White, R. R. (2007). Carbon finance: The financial implications of climate change. Hoboken, NJ: Wiley.Google Scholar
- Levine, R. (2005). Finance and growth: Theory and evidence. In P. Aghion & S. Durlauf (Eds.), Handbook of economic growth (1st ed., Vol. 1, pp. 865–934). North-Holland: Elsevier.Google Scholar
- Richardson, N. (2012). Policy significance of EPA’s greenhouse gas reporting program, Issue Brief, Washington, DC: Resources for the Future. Retrieved from https://www.google.com.au/search?q=Policy+significance+of+EPA%E2%80%99s+greenhouse+gas+reporting+program,+Issue+Brief&ie=utf-8&oe=utf-8&gws_rd=cr&ei=okO-V7buEcGp0ASmn6rYAw.
- Rodan, M. (2017). Westpac caves to coal protesters on lending. The Australian. 28 April.Google Scholar
- Saunders, A., & Allen, L. (2002). Credit risk measurement—New approaches to value at risk and other paradigms. New York, NY: Wiley.Google Scholar
- Saunders, A., & Potter, B. (2015). National Australia Bank rules out funding Adani’s Carmichael coal mine. The Sydney Morning Herald. Retrieved from http://www.smh.com.au/action/printArticle?id=1000014897.
- Schumpter, J. A. (1912). The theory of economic development (Redvers. Opie, Tras., 1934). Cambridge, MA: Harvard University Press.Google Scholar
- Trucost. (2009). Investment: Climate change briefing paper. London: Association of Chartered Certified Accountants (ACCA).Google Scholar
- UNEP FI. (2006). Global climate change: Risk to bank loans. Retrieved from http://www.unepfi.org/fileadmin/documents/global_climate_change_risk.pdf.
- Verco. (2013). UK mandatory carbon reporting: Implications for company valuations. Retrieved from http://www.vercoglobal.com/images/uploads/files/Mandatory_Carbon_Reporting_-_Company_valuation_-_March_2013.pdf.
- West, M., & Cox, L. (2015). Adani and Commonwealth Bank part ways, casting further doubt on Carmichael coal project, The Sydney Morning Herald. Retrieved from http://www.smh.com.au/action/printArticle?id=999015177.
- Yeates, C. (2016). Banks’ climate change talk not yet matched by action. The Sydney Morning Herald. Retrieved from http://www.wmh.com.au/business/banking-and-finance/banks-climate-change-talk-not-yet-matched-by-action-20161120-gstp8q.html.