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

Author

Listed:
  • Irem Erten

    (University of Warwick - Warwick Business School)

  • Steven Ongena

    (University of Zurich - Department Finance; Swiss Finance Institute; KU Leuven; NTNU Business School; Centre for Economic Policy Research (CEPR))

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.

Suggested Citation

  • Irem Erten & Steven Ongena, 2024. "Do Banks Price Environmental Risk? Only When Local Beliefs are Binding!," Swiss Finance Institute Research Paper Series 24-40, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp2440
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    More about this item

    Keywords

    Climate change; biodiversity risk; bank credit; personal beliefs;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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