Greenhouse gas emissions and bank lending in Japan

This paper examines the effect of firms’ greenhouse gas (GHG) emissions on bank loans, using matched bank-firm data from Japanese listed companies between 2006 and 2018. Previous research suggests that climate risks priced in corporate bonds or syndicated loans are statistically significant but economically minor. This paper explores bank lending behavior by focusing on loan amounts, which we consider to have a more direct influence on firms’ investment decisions. Our findings indicate that banks significantly reduce loans to firms with higher GHG emissions. Moreover, this effect of GHG emissions on Japan’s bank loans appears to have been present even before the signing of the Paris Agreement, which existing literature identifies as the point where GHG emissions began to be factored into the pricing of debt instruments as a component of credit risk. Finally, banks with higher leverage and lower ROA are more likely to reduce loans to firms with high GHG emissions.