OCE research seminar: Striving for Sustainability in Banking? Evidence from Socio-Environmental Guidelines in Brazil

The EBRD’s Office of the Chief Economist cordially invites you to a presentation by Mikhail Mamonov (Toulouse Business School)

Striving for Sustainability in Banking? Evidence from Socio-Environmental Guidelines in Brazil

Abstract

We examine the impact of environmental policy restrictions on bank lending and their cross-sectional implications for the performance of borrowing firms. In April 2014, the Central Bank of Brazil introduced the Socio-Environmental Responsibility Policy (PRSA), which aimed to compel banks to reduce lending to highly polluting firms. To identify the policy’s effect, we exploit its staggered implementation: eleven banking conglomerates were given nine months to comply, while all other banks received an additional six-month extension before the PRSA came into force. We merge data from the full corporate credit registry (SCR) with the Ministry of Environment’s registry of potentially polluting activities (CTF/APP), covering 390,000 unique firms from 2011 to 2019.

We further incorporate bank financial statements (COSIF), firm-level employment data (RAIS), and other relevant bank- and firm-level characteristics.

First, we document that early-treated banks reduced lending to highly polluting firms immediately following the PRSA announcement, whereas later-treated banks adjusted only after the policy was formally enacted.

Second, we find that early-treated banks with high ex-ante loan exposure to polluting firms curtailed their credit supply more significantly. Specifically, firms with high pollution potential experienced a credit contraction of approximately 23%, while firms with low pollution potential remained unaffected by the policy change.

Third, later-treated banks reduced credit supply to highly polluting firms by about 30%.

Fourth, highly polluting firms with credit relationships at affected banks saw a 31% decline in market sales and reduced their labor demand during the first two years after the PRSA announcement. Overall, our findings show that both banks and their corporate borrowers respond sharply to enforceable green credit regulations.

About Mikhail Mamonov

The event is taking place at EBRD HQ at 13:00 on 16 September. Please register at newmanl@ebrd.com.