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How do banks price carbon risk? Evidence from India

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  • Chaudhry, Neeru
  • Kumari, Damini

Abstract

Do banks assign more weight to borrower characteristics such as growth prospects and information quality than to carbon risk exposure? For a sample of Indian firms, we find that the cost of debt decreases with increasing energy-consumption. This relationship is stronger for young firms, which have more growth opportunities and are dependent on external sources for their financing needs. Banks protect themselves by offering cheaper rates to financially-unconstrained firms and firms with high information quality. For a given energy-consumption level, the cost of debt increases with controlling shareholder and institutional ownership, when government is a minority shareholder, or when the lender is a public-sector bank.

Suggested Citation

  • Chaudhry, Neeru & Kumari, Damini, 2024. "How do banks price carbon risk? Evidence from India," Pacific-Basin Finance Journal, Elsevier, vol. 84(C).
    • Handle: RePEc:eee:pacfin:v:84:y:2024:i:c:s0927538x24000556
    DOI: 10.1016/j.pacfin.2024.102304
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    More about this item

    Keywords

    Bank loans; Energy consumption; Carbon risk; Climate risk; Emerging economy; India;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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