Does Banks’ environmental engagement impact funding costs?

Abstract

Despite growing research on corporate environmental performance, the effect of banks’ environmental engagement on funding costs remains unclear. While some evidence suggests that environmentally committed banks secure lower funding costs, other studies report no significant effect, leaving the evidence inconclusive. This study addresses this inconsistency by analysing distinct funding cost measures in a global sample and demonstrating that banks with strong environmental engagement consistently benefit from reduced funding costs across multiple dimensions. The advantage is more pronounced among banks in advanced, less concentrated economies with stronger currencies and lower deposit levels. The Paris Agreement has raised awareness among depositors and investors about their role in mitigating climate change. Although such support is generally driven by sound risk management, capital adequacy, and asset size, periods of rising real interest rates and economic crises shift priorities toward higher financial returns. Our results remain robust across alternative samples, model specifications, estimation methods, funding cost measures, and endogeneity correction techniques.