Jinhong Wu

Working in Progress

Credit Allocation under Physical and Transition Climate Risks

Job Market Paper; Link to the paper

Abstract: This paper studies how banks adjust credit allocation in response to firms’ exposure to climate-related physical and transition risks, with a focus on non-listed SMEs. Using granular firm-level measures of both risk types matched to a universal bank–firm credit dataset from Danish administrative registers, I document that banks reduce credit growth to firms with higher exposure to either risk. A one standard deviation increase in physical (transition) risk is associated with a 1.1–1.4% (1.6–2.2%) decline in loan growth. Beyond average effects, I find evidence of credit reallocation across firms with heterogeneous risk profiles: more credit is allocated to firms with low joint exposure to physical and transition risks and to high-risk firms that engage in greening activities. Credit contractions are strongest when climate risks compound existing borrower vulnerabilities, such as financial constraints and asset exposure, and among banks with higher climate risk exposure and repeat lending relationships. Mechanism tests indicate that banks’ credit risk considerations play an important role in driving these credit responses.

Climate Risks and Firms’ Innovation

with Grace Gu, Ismir Mulalic, and Dario Pozzoli; 

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;  (CEPR WP; NBER WP)

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 the allocation of bank loans across industries and within industries across firms, allowing for heterogeneity of firm 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, while in the EU bank lending is more likely to facilitate it. Zooming in on Denmark, for which we have data on the full universe of firms and banks, we find more significant credit reallocation to greener firms, especially within industries. However, the reallocation of funds to green firms is, to a large extent, a byproduct of green firms becoming bigger. We do not find any evidence consistent with banks active stewardship of green transition. 

Email: jiwua@dtu.dk & jwu.eco@cbs.dk 

Address:

Produktionstorvet

Building 424

2800 Kgs. Lyngby