Do Commercial Banks Incorporate the Environmental Risk in Loan Pricing Decision? Evidence from the Environmental Responsibility Score

Abstract

With the rapid development of China’s economy, the problem of environmental pollution is becoming increasingly serious, and has become one of the important issues of China’s economic construction at present and in the future. The Chinese government has adopted many measures to solve environmental problems, including a series of financial policies. Since bank credit is the most important financing source for Chinese enterprises, the existing financial policies are mainly made around bank loans. If only from the aspect of scale, the green credit of China’s commercial banks has made greatly impressive achievements. However, there is no clear answer to questions such as whether commercial banks can effectively identify, measure, monitor and control the environmental risk in credit business activities”. Under the continuous promotion of the regulatory authorities, have China’s commercial banks taken into account the environmental risk of borrowing enterprises when pricing loans? This paper collects 8677 loan data of commercial banks of China’s 1127 listed companies from 2010 to 2015, and empirically tests the impact of environmental responsibility on loan interest rates based on the environmental responsibility score of listed companies provided by Hexun. We find that there is a negative impact of the environmental responsibility score on loan interest rates, yet this impact varies with the interpretation difference of commercial banks on the environmental responsibility score. On the one hand, for those banks with advantages in the access to proprietary information, the environmental responsibility score provides limited incremental information and thus has a weaker impact on their loan interest rates than other banks’. On the other hand, commercial banks have higher expectations on the environmental responsibility of listed companies in industries with heavy environmental pollution, which weakens the impact of the environmental responsibility score on loan interest rates. After controlling the effects of endogenous model, sample bias and alternative interpretation, the conclusions are still valid. The contributions of this paper are as follows: (1) It uses a large amount of loan data to analyze the impact of environmental responsibility on loan interest rates from the perspective of commercial banks, and examines the possible impact of the interpretation difference of commercial banks on the above relationship,which makes up for the deficiency of existing studies. (2) It not only focuses on the impact of environmental responsibility on loan interest rates, but also examines the possible impact of other social responsibility, further enriching the research on the relationship between corporate social responsibilities and financing costs. (3) It demonstrates that in the context of building an ecological civilized society and strengthening environmental protection regulation, the environmental risk is also an important factor affecting the loan interest rates of China’s commercial banks, enriching the literature related to loan pricing decision of China’s commercial banks. Based on the loan data of listed companies, this paper empirically studies the impact of the environmental responsibility score on the loan interest rates of commercial banks. It has some implications for policy-makers and analysts. Firstly, listed companies should further perfect their disclosure of environmental responsibility and improve the quality of information, so as to reduce the information asymmetry between listed companies and commercial banks, and then cut down the cost of loans. Secondly, listed companies should pay attention to their environmental responsibility, increase investment in environmental responsibility, improve the level of environmental responsibility management, and scientifically understand the relationship between environmental responsibility and financing costs.