Information about Climate Transition Risk and Bank Lending

73 Pages Posted: 17 Jan 2024 Last revised: 10 Nov 2024

See all articles by Bhavyaa Sharma

Bhavyaa Sharma

University of California, Santa Cruz

Date Written: January 2, 2024

Abstract

Do banks price their borrowers' exposure to climate transition risk? I find that in the E.U., firms negatively exposed to climate transition risk face higher lending rates by banks specialized in their borrowers' industry. However, I also find evidence of lower lending rates to more exposed firms after an oil supply news shock relevant for energy-intensive firms, especially during periods of high aggregate financial stress. Interpreting bank specialization as a source of heterogeneity in costs of private information acquisition, I develop a bank lending model with competitive lending, costly information acquisition, and non-Bayesian belief updating. Because of screening, specialized banks can better distinguish between borrowers' risk exposure, resulting in relatively higher lending rates to more exposed firms. However, this interest rate differential decreases in favor of more exposed borrowers when banks underreact to relevant public information. This effect is more pronounced during periods of poor borrower quality or increased financial stress. These results imply that lowering banks' cost of acquiring firm-level transition-risk exposure information is crucial to reduce green firms' financing costs, even when there is high quality public information and communication about decarbonization.

Keywords: Information and Knowledge, Beliefs, Banks, Sustainability JEL Codes: D82, G21, Q54, Q55

JEL Classification: D82, G21, Q54, Q55

Suggested Citation

Sharma, Bhavyaa, Information about Climate Transition Risk and Bank Lending (January 2, 2024). Available at SSRN: https://ssrn.com/abstract=4682534 or http://dx.doi.org/10.2139/ssrn.4682534

Bhavyaa Sharma (Contact Author)

University of California, Santa Cruz ( email )

1156 High St
Santa Cruz, CA 95064
United States

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