Do Banks Practice What They Preach? Brown Lending and Environmental Disclosure in the Euro Area

We examine whether the level of environmental disclosure in financial reports equates with less brown lending by banks. We use granular credit register data and detailed information on the firm-level intensity of greenhouse gas emissions and find a negative relationship. This relationship is contingent on the tone of the financial report: a negative tone, reflecting greater awareness of environmental risks, leads to less brown lending; a positive tone, indicating lower awareness, leads to more brown lending. These findings highlight the importance of the awareness of environmental risks as critical, urgent, and pressing threats to creating environmentally responsible lenders.