For banks, transparency sets the tone

New research presented in a European Central Bank working paper shows a negative relationship between environmental disclosure and brown lending. The authors of Do Banks Practice What They Preach? Brown Lending and Environmental Disclosure in the Euro Area examine whether the level of environmental disclosure in banks’ financial reports matches less brown lending portfolios. From the abstract: “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, the study says. 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.” Authors: Leonardo Gambacorta, Bank for International Settlements and Centre for Economic Policy Research; Salvatore Polizzi, University of Palermo; Alessio Reghezza, European Central Bank; and Enzo Scannella, University of Palermo.

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