Carbon risk and the cost of bank loans: Evidence from China

Abstract

This study examines whether and how carbon risk affects the cost of bank loans using Chinese listed industrial firms from 2009 to 2019. We find a significantly positive relationship between carbon risk and the cost of bank loans. Considering the introduction of the China Green Credit Guidelines in 2012 as an exogenous shock, the positive effect of carbon risk on the cost of bank loans for a firm is more significant. In the cross-section, the positive effect is more pronounced for firms with low environmental performance, firms with low green innovation, firms in high-carbon industries, and non-state-owned enterprises. Furthermore, we document that a firm's profitability and earnings volatility are two underlying channels through which carbon risk affects the cost of bank loans. These findings are robust to addressing endogeneity concerns with the use of propensity score matching and instrumental variables methods, to alternative model specifications and proxies for carbon risk.