Virtual lecture: Carbon Emissions and the Bank-Lending Channel

For identification, we use bank-level commitments to decarbonization to proxy for changes in banks’ green preferences and, via these bank commitments, shocks to firms with previous credit from these banks. We find that firms with higher scope 1 emissions previously borrowing from banks making commitments subsequently receive less total bank credit. The economic mechanism at play is bank credit supply. The reduction in bank lending to brown firms triggers the reduction in these firms’ total debt, leverage, total assets, and real investments, and an increase in liquid assets. The effects are non-linear, with a strong relative cut (increase) in bank lending and investments for brown (green) firms, and mild effects for other firms. Despite the real and financial effects, we find no improvement in hard firm-level environmental scores for brown firms, but only evidence consistent with firms’ greenwashing. Overall, our results suggest that banks decarbonize their assets via credit reallocation (from brown to green firms) rather than via providing loans to brown firms for the investment necessary to reduce carbon emissions.

To join the lecture via ZOOM, please contact William McShane.