Do banks practice what they preach? Brown lending and environmental disclosure in the euro area

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summary

concentration

Reducing information asymmetries between banks and their stakeholders ensures the functioning of market discipline mechanisms that allow investors, depositors and other stakeholders to monitor banks’ risk-taking practices. essential for. Despite regulatory requirements, “environmental There is still a risk of being involved in “deceptive accounting practices.”

contribution

By matching a customized, expert-validated disclosure index with loan-level data collected from the European System of Central Banks’ (AnaCredit) credit register, bank- and company-specific characteristics, and company GHG emissions data. , to detect environmental fraud by banks. Collected from Urgentem database. We address the potential endogeneity between banks’ environmental disclosures and their lending practices by relying on two competing theoretical frameworks. (i) According to the ‘signaling theory’, banks can use environmental disclosure to demonstrate their actual commitment to combating climate change and managing environmental risks. Effectively limit negative financial impact. (ii) “Impression Management Theory.” This suggests that banks can use environmental disclosure to manipulate stakeholders’ and investors’ perceptions about their efforts to manage environmental risk impacts, regardless of their actual actions.

Investigation result

We reject the environmental window dressing hypothesis. Specifically, a one standard deviation increase from the mean of the environmental disclosure index reduces the amount of lending to more polluting firms by 0.7%. This result is consistent with ‘signaling theory’ and contrasts with ‘impression management theory’. However, this depends on the overall tone of the disclosure. Banks that show genuine concern about environmental issues in their annual reports and use a more negative tone typically have lower confidence in polluting companies. In contrast, banks that take a proactive stance that reassures investors and stakeholders about environmental risks increase their lending to companies that pollute the environment. Therefore, we can see that banks that use a positive tone in their reports are subject to fraudulent accounting practices.


abstract

This study investigates whether the level of environmental disclosure in banks’ financial reports is consistent with a low-Brown loan portfolio. Using detailed credit register data and detailed information on firm-level greenhouse gas emissions intensity, we find a negative relationship between environmental disclosure and brown lending. However, this impact depends on the tone of the financial report. Banks that express negative attitudes, reflecting genuine concern and awareness of environmental risks, tend to lend less to firms that are more polluting. Conversely, banks that exhibit a positive attitude, indicating low concern or awareness of environmental risks, tend to increase lending to companies that pollute the environment. These findings highlight the importance of raising awareness of environmental risks so that banks recognize them as a serious, urgent and immediate threat, leading to a real commitment to act as environmentally responsible lenders. is highlighted.

JEL classification: G20, G21, M41, Q56

Keywords: green banking, brown financing, banks, environmental disclosure, environmental risks, climate change



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