Do Banks Practice What They Preach? Brown Lending and Environmental Disclosure in the Euro Area

52 Pages Posted: 14 Nov 2023

See all articles by Leonardo Gambacorta

Leonardo Gambacorta

Bank for International Settlements (BIS); Centre for Economic Policy Research (CEPR)

Salvatore Polizzi

University of Palermo - d/SEAS

Alessio Reghezza

European Central Bank (ECB)

Enzo Scannella

University of Palermo - d/SEAS

Date Written: November, 2023

Abstract

This study examines whether the level of environmental disclosure in banks’ financial reports matches less brown lending portfolios. Using granular credit register data and detailed information on firm-level greenhouse gas emission intensities, we find a negative relationship between environmental disclosure and brown lending. However, this effect is contingent on the tone of the financial report. Banks that express a negative tone, reflecting genuine concern and awareness of environmental risks, tend to lend less to more polluting firms. Conversely, banks that express a positive tone, indicating lower concern and awareness of environmental risks, tend to lend more to polluting firms. These findings highlight the importance of increasing awareness of environmental risks, so that banks perceive them as a critical and urgent pressing threat, leading to a genuine commitment to act as environmentally responsible lenders.

Keywords: banking, brown lending, climate change, environmental disclosure, environmental risks, green banking

JEL Classification: G20, G21, M41, Q56

Suggested Citation

Gambacorta, Leonardo and Polizzi, Salvatore and Reghezza, Alessio and Scannella, Enzo, Do Banks Practice What They Preach? Brown Lending and Environmental Disclosure in the Euro Area (November, 2023). ECB Working Paper No. 2023/2872, Available at SSRN: https://ssrn.com/abstract=4632041 or http://dx.doi.org/10.2139/ssrn.4632041

Leonardo Gambacorta (Contact Author)

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Salvatore Polizzi

University of Palermo - d/SEAS

Viale delle Scienze, edificio 13
Palermo, 90124
Italy

Alessio Reghezza

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Enzo Scannella

University of Palermo - d/SEAS ( email )

Viale delle Scienze, edificio 13
Palermo, 90128
Italy
+3909123895305 (Phone)
+39091489346 (Fax)

HOME PAGE: http://www.enzoscannella.com

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