The Economics of Net Zero Banking

Abstract

Banks have voluntarily committed to align their lending portfolios with a net zero path toward a decarbonized economy. In this review, we explore the economic channels for why portfolio decarbonization might be consistent with lender profit maximization. We frame the question by positing that net zero lending may create differential value through the channels of risk and returns, where return topics span profit margins and lending book growth arguments. We then use the lens of the frame to survey the literature and speak to gaps in research knowledge. We uncover multiple roles for risk arguments influencing decarbonization. Moreover, decarbonization and green investment are tied to enhanced profitability through bank lending growth. Yet, the literature has many dots yet to connect. We suggest that future work may draw further connections between the literature in climate finance and the broader literature in banking, to enhance our understanding of the role that banks will play in the net zero transition.

JEL Classification: G21, G31, G28, Q54