Does the market value the green credit performance of banks? Evidence from bank loan announcements

Abstract

Despite the key role played by banks in shifting the global economy toward sustainable development, little is known about how the integration of environmental considerations into their lending decisions affects their market valuation. Using a sample of announcements of bank loans issued by Chinese listed banks and an event study methodology, this study examines how the market values the green credit performance of banks. We find that banks with superior green credit performance have significantly higher market valuation upon loan announcements. Cross-sectional analyses show that the positive effect of banks' green credit performance is more pronounced when banks are less exposed to political pressures. This positive effect is also stronger when borrowers have strong environmental and social (ES) performance, provide ES disclosures, operate in industries that are not heavily polluting, have high institutional ownership, and are controlled by private shareholders. Finally, our path analysis shows that green credit increases banks' market valuation by improving the prospect of future cash flows and reducing credit risk for banks. Overall, we document that green credit is a value-enhancing practice for banks in emerging markets such as China, where legal institutions and environmental regulations may not be as developed as in more advanced markets.