Do Banks Practise What They Preach?

Brown Lending and Environmental Disclosure in the Euro Area

February 1, 2024Published by Bank of International Settlements

Environmentally transparent European banks lend less to highly polluting firms, finds this research paper for the Bank for International Settlements. However, banks that are less aware of environmental risks try to reassure investors and stakeholders by using positive words in their public documents, rather than reducing their exposure to environmental risks.

The results underscore the importance of raising awareness about climate risk amongst bank managers and introducing policies that directly promote responsible lending, say authors  Leonardo Gambacorta, Salvatore Polizzi, Alessio Reghezza and Enzo Scannella.

The EU has made substantial progress to reduce information asymmetries between banks and their stakeholders by improving regulation around environmental disclosure. While this is important, the authors say the results show this is insufficient alone to build sustainable economic growth.

The paper examines whether the level of environmental disclosure in banks’ financial reports correlates to lower lending to high polluting firms, and if this relationship is modified by the tone of the report. In doing so it provides a framework to distinguish between banks that produce disclosures as a form of “window dressing”, as opposed to signalling their genuine commitment to addressing climate risk.

This is important, say the authors as, if banks do not “practise what they preach”, they will betray investors and stakeholders’ trust.

Using textual analysis of bank disclosure financial and sustainability reports, the authors create a tailor-made bank index of environmental disclosure. This index is then matched with loan-level and firm-level GHG emissions data as well as bank-level corporate governance and balance sheet data.

The results indicate that overall more transparent banks lend less to highly polluting firms, suggesting that disclosures are generally used to signal banks’ positive actions, and not for window dressing. The interaction term is statistically significant at the 1-10% significance level.

Banks that adopt a less positive tone to discuss climate risks significantly decrease lending to highly polluting firms, by approximately 15%, indicating that they are aware of climate change as an imminent threat.

For banks that use a more positive tone, the effect is much lower, at -7.4%, indicating they are less concerned about environmental risks, regardless of their transparency.

This page was last updated February 2, 2024

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