Conference Agenda

We assess the feasibility, optimality, and policy implications of Environmental, Social, and Governance (ESG) linked lending. Privately informed borrowers signal low financial risk to banks by engaging in green investments. We derive conditions where banks segment the market into green and brown loan products. Signal value determines equilibrium green investments, not environmental impact, and the market sustains only limited green lending. The optimal carbon tax replaces the signaling value with the marginal damage and outperforms a brown reserve requirement. Overall, green lending enhances welfare in an unregulated market, but can make the social optimum infeasible, even with carbon tax regulation.

The ongoing transition to a low-carbon economy creates risks and opportunities for firms. Measuring, disclosing, and mitigating such risks is a significant focus of climate finance. Modelling firms and their supply chains with Melitz-type industries, we show that high emissions do not necessarily translate to high transition risks. Other factors alongside emissions are critical, including market structure, where emissions are released in the value chain, and the drivers of decarbonization—whether driven by costly regulations or productivity-enhancing innovation. Moreover, commonly used risk metrics can misclassify some firms as vulnerable when they might actually benefit from economy-wide decarbonization. We outline conditions under which a firm’s Scope 1, 2, and 3 emissions accurately reflect its risk. We also identify scenarios in which aggregating these different emissions scopes enhances (or obscures) the true picture of a firm’s transition risk. Our paper lays out a framework for evaluating and improving the wide variety of transition-risk metrics currently used to guide investor decisions, inform stakeholders, and comply with climate-risk disclosure mandates.

This paper analyses the interactions between climate-induced migration, mitigation policy, and adaptation finance. Migration triggered by climate damages shifts abatement burdens across regions: when people move from low-emitting developing countries to high-emitting industrialised ones, mitigation becomes more demanding in the destination region while easing in the source. We develop a stylised two-region model in which the North can provide adaptation finance to the South to reduce migration pressures, transforming adaptation from a private to a quasi-public good. The analysis considers both altruistic and self-interested preferences in the North and is complemented by illustrative simulations. We show that even in a self-interested world, climate-induced migration generates incentives for adaptation finance, reframing it as potentially mutually beneficial.

Small and Medium-sized Enterprises (SMEs) form the backbone of the economy both in terms of value added and employment, making them essential to reach economy-wide decarbonization goals. To invest in decarbonization, SMEs mainly rely on bank lending as an external source of capital. When providing such lending, a bank needs to assess the creditworthiness of the SME, yet public knowledge on this assessment is scarce because bank lending data is proprietary and SMEs are mostly exempt from reporting requirements. In this article, we construct a 10-year panel dataset covering the loan portfolios of 11 banks from the SME-specialized banking group ProCredit to analyze the difference in default probabilities between green and non-green SMEs. The dataset covers lending to >43,000 SMEs, of which 20.5% use a green loan at some point, by banks in Albania, Bosnia and Herzegovina, Bulgaria, Ecuador, Georgia, Kosovo, Northern Macedonia, Moldova, Romania, Serbia, and Ukraine. We employ a two-way fixed effects regression model with matching at the firm level and find a reduction of ~16% in the probability of default for green SMEs, controlling for credit risk and other credit-relevant firm characteristics. Using data on the use of proceeds of these loans, we find the largest risk reduction effect for solar PV installations (~40%), followed by energy efficiency investments (~13%), with no significant effects for other green investments, indicating a potential hedging effect against energy price fluctuations. We further find that this effect is slightly positively related to the intensity of green lending and inversely related to the bank’s risk rating, indicating an increased risk mitigation effect of green lending for SMEs with greater shares of green loans and those in financial distress. Our findings suggest that incorporating the observed risk differential into banks’ risk and pricing models could improve financial market efficiency while simultaneously improving the availability of green loans to SMEs.