Jinhong Wu

Working in Progress

Climate Change and Bank Lending: Evidence from Physical and Transition Risks

Job Market Paper; Link to the paper

Abstract: Banks are indirectly exposed to two types of climate-related risks through their lending activities: (i) physical risks, arising from damages to firms due to increasingly frequent extreme climate events, and (ii) transition risks, associated with the implementation of climate policies aimed at reducing emissions. This study examines how firms’ exposure to these two types of risks affects bank credit allocation. Using novel, granular measures for both risk types, merged with a universal bank–firm linked credit dataset from Danish administrative registers, I find that banks reduce credit growth to firms with high physical and transition risks. Specifically, a one standard deviation increase in a firm’s exposure to physical risks (transition risks) results in a 1.1%–1.4% (1.6%–2.2%) reduction in loan growth. I also document a reallocation effect: more credit is allocated to risky but “greening” firms and to firms with low joint exposure to physical and transition risks. The reduction in credit is most pronounced for financially constrained firms (e.g., small or highly leveraged firms) and is concentrated among banks with high climate risk exposure and repeat lending relationships. Finally, I show that banks’ credit risk concerns likely play an important role in driving these observed effects.

Climate Risks and Firms’ Innovation

with Grace Gu, Ismir Mulalic, and Dario Pozzoli; Draft available upon request

Abstract: Over the past two decades, there has been a significant increase in climate-related risks, including extreme weather events (physical risks) and the implementation of climate-change mitigation policies (transition risks). In this study, we investigate how these risks affect firms' innovation outcomes, including those related to green technologies. We first develop a partial equilibrium model, in which firms choose how many workers to employ for respectively R&D and production activities in response to rising physical and transition risks. The model predicts an increase in the share of total researchers in employment and in the share of researchers inventing green technologies under certain conditions. To test these predictions, we use Danish-matched employer-employee data combined with additional sources that allow us to measure firms’ innovation outcomes and climate risks. Our empirical evidence generally supports the model's predictions, indicating that firms increase their share of R&D workers and innovation, especially in the green area in response to climate risks, although very modestly.

Firm Emissions and Credit Allocation

with Grace Gu, Galina Hale, and Bhavyaa Sharma; Draft available upon request

Do banks help or hamper green transition?  To answer this question, we analyze the dynamics of bank lending to firms in the US, EU, and separately Denmark in relation to the borrowers' emissions of CO2.  We evaluate allocation of bank loans across industries and within industries across firms, allowing for heterogeneity of firms emissions and changes in these emissions.  To facilitate green transition, bank lending needs to flow to greener and greening firms, but not out of high-emission industries that need funding to transition to cleaner production methods.  Using syndicated loan data we find that for US borrowers, bank lending was likely hampering green transition prior to 2016, while in the EU bank lending facilitates it.  Zooming on the Denmark, for which we have more detailed data, we find that reallocation of funds to greening firms is to a large extent a byproduct of the industry becoming more green. Consistent with previous findings, we do not find any substantial impact of Net Zero Banking Alliance (NZBA) membership on banks' credit reallocation to greener firms or industries. 

Email: jiwua@dtu.dk & jwu.eco@cbs.dk 

Address:

Produktionstorvet

Building 424

2800 Kgs. Lyngby