The Impact of Green Lending on Credit Risk in China

Yujun Cui,Sean Geobey,Haiying Lin,Olaf Weber

doi:10.3390/su10062008

Yujun Cui, Sean Geobey + Show 2 more

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https://doi.org/10.3390/su10062008

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Abstract

This study explores China’s green credit policy from a credit risk perspective. Green finance has been growing rapidly in China since the government issued its Green Credit Policy. The objective of this study is to explore whether green loans are less risky than non-green loans. Based on a five-year dataset of 24 Chinese banks, we used panel regression techniques, including two-stage least square regression analysis and random-effect panel regression to examine whether a higher green credit ratio reduces a bank’s non-performing loan ratio (NPL ratio). The results suggest that allocating more green loans to the total loan portfolio does reduce a bank’s NPL ratio. We conclude that institutional pressure by the Chinese Green Credit Policy has a positive effect on both the environmental and the financial performance of banks. The study contributes to the literature on the correlation between green lending and credit risks, as well as to the literature on the impact of institutional pressure on environmental and financial risks.

Highlights

The financial sector can both promote and hinder a cleaner environment [1]
This paper addresses the current lack of empirical studies examining the Chinese Green Credit Policy with regard to its impact on the banks that it regulates
Our study provides empirical evidence for the benefits that the Green Credit Policy creates for Chinese banks with regard to reducing credit risks

Summary

Introduction

The financial sector can both promote and hinder a cleaner environment [1]. Banks, for instance, can choose to lend money to clean or dirty industries. For 25 years, banks and other investors have addressed environmental issues through voluntary codes of conduct, such as the United Nation’s (UN) Environment Programme’s Financial Initiative [2], the Equator Principles for Project Finance [3], and the UN Principles for Responsible Investment (UNPRI) (www.unpri.org). Involvement in these voluntary initiatives helps signatories improve their reputation, public recognition, and risk management when coupled with stricter standards and increased transparency [4]. These regulations are compulsory for all Chinese banks, regardless of ownership structure, and cover government-owned banks, joint-stock banks, and credit unions [16]

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