Green loans and bank risk: Navigating the path to sustainable finance

Abstract

This paper investigates the relationship between green loans and the banks' risk as measured by credit default swaps (CDS). We analyze a sample of 308 green loans issued by 47 international banks. We assess the short-term impact of green loans on the CDS spread and the factors affecting the CDS spread of a bank issuing a green loan. We find a “green effect” in issuing a green loan. The banks benefit in terms of reputation. The pattern is confirmed across all regions with specific factors affecting the Cumulative Abnormal Returns (CAR). Green bond characteristics and country-specific features significantly influence CARs, although the effects vary across regions.