Firm Emissions and Credit Allocation

Do banks help or hamper green transition? To answer this question, we analyze the dynamics of bank lending to firms in the US, EU, and separately Denmark in relation to the borrowers' emissions of CO2. We evaluate the allocation of bank loans across industries and within industries across firms, allowing for heterogeneity of firm emissions and changes in these emissions. To facilitate green transition, bank lending needs to flow to greener and greening firms, but not out of high-emission industries that need funding to transition to cleaner production methods. Using syndicated loan data, we find that for US borrowers, bank lending was likely hampering green transition, while in the EU bank lending is more likely to facilitate it. Zooming in on Denmark, for which we have data on the full universe of firms and banks, we find more significant credit reallocation to greener firms, especially within industries. However, the reallocation of funds to green firms is, to a large extent, a byproduct of green firms becoming bigger. We do not find any evidence consistent with banks active stewardship of green transition.