Stockholm (NordSIP) – Delivering the keynote speech at the Banking Supervision Research Conference organised by the European Central Bank on 3 May, Mariassunta Giannetti from Stockholm School of Economics and CEPR provides plenty of food for thought to the attending bankers. Starting on a positive note, the researcher asserts that the proliferation of corporations and banks’ sustainability disclosure and sustainability rating agencies is undeniable. Only to follow up on a more controversial note, posing the important question, “Are these disclosures really informative?”
The big disconnect
Giannetti and her research fellows Martina Jasova, Maria Loumioti, and Caterina Mendicino recently published a paper on the subject, “Glossy Green” Banks: The Disconnect Between Environmental Disclosures and Lending Activities. Their analysis utilises granular loan-level data from a Euro-area credit registry, Anacredit, that contains information on commercial loans issued by 553 banks. Exploring the relationship between these banks’ environmental disclosures and lending activities, they come to some discouraging conclusions. In short, the research indicates that banks portraying their activities as more sustainable extend more credit to borrowers in brown industries and borrowers with higher emissions in general.
“Our results suggest that banks overemphasise their climate goals and credentials while continuing their relationships with polluting borrowers,” state the authors.
Financing transition or zombies?
Willing to give banks the benefit of the doubt, Giannetti et al. explore the possibility that banks with extensive environmental disclosures lend to borrowers in brown industries to facilitate their transition to greener technologies, which are typically capital-intensive and require large amounts of credit. “However, we find no evidence that firms in brown industries that receive credit from high-environmental-disclosure banks invest in R&D or fixed assets more than other firms in their industries, suggesting that transition lending is unlikely to drive our findings,” they conclude. The results indicate that these banks are unlikely to engage in transition lending.
Admittedly, the high-sustainability-profile banks avoid starting new relationships with brown borrowers. This is not much of a consolation, however, as they still tend to extend more loans to brown borrowers with which they already have stronger relationships. Moreover, they appear extra eager to fund borrowers in brown industries that are less profitable, have low productivity, and lower interest coverage ratio. It makes business sense, of course, as such ‘zombie’ borrowers typically have fewer financing alternatives and terminating the relationships would force banks to realise credit losses. “Relationships with zombie firms make it particularly hard for banks to reduce their environmental impact,” the researchers point out.
Verify and standardise
Sadly, Giannetti and her colleagues come to a conclusion that “mandatory sustainability reporting and the use of an external auditor do not appear to influence the relation between environmental-themed disclosures and brown lending.” They attribute this to the fact that climate disclosures are not easily verifiable or standardised to be effectively audited or regulated. Part of the problem is that banks’ environmental disclosures often reflect their underwriting activities in the more transparent bond market but not their lending policies.
“Our results support concerns about the lack of transparent and consistent sustainability disclosures and indicate that efforts to increase the comparability and transparency of sustainable financing products should be extended to banks,” is the clear message Giannetti leaves the bankers at the conference with.