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

Abstract

university of warwick university of zurich, ku leuven, ntnu business school, swiss finance institute, and cepr do banks price environmental risk? only when local beliefs are binding! irem erten ∗, steven ongena † august 25, 2024 abstract we study the environmental footprint of firms on their cost of bank credit. we document that at loan origination, banks charge higher rates and reduce their stakes in firms with more greenhouse emissions, pollution, waste, and/or natural damage, especially when weakly capitalized and borrowers operate in “greener” states. the price penalty intensifies during local heating shocks and interacts with regional biodiversity risk. following trump’s withdrawal from the paris agreement, banks reduce their environmental risk pricing in “browner” states. in sum, the environmental sensitivity in bank lending is also driven by local attitudes and regulatory enforcement. key words: climate change, biodiversity risk, bank credit, personal beliefs. jel classification: g12, g18, g21 ∗warwick business school, university of warwick, irem.erten@wbs.ac.uk †university of zurich, swiss finance institute, ku leuven, ntnu business school, cepr, steven.ongena@bf.uzh.ch. thanks very much to alex wagner, camelia minoiou, francesco vallascas, david rakowski, and the participants in the behavioural finance conference, the fma international europe, the efma, the financial engineering conference, and the ibefa (weai) conferences for their valuable comments. 1 introduction …

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