Can Finance Save the World? Measurement and Effects of Coal Divestment Policies by Banks

Format:Print
| Language:English
| Pages:31

Abstract

We study whether divestment policies are an effective tool to address climate change, using coal lending bans by banks around the world as a laboratory. In contrast to theories arguing divestment is ineffective because capital is highly subsitutable, we find large effects of these policies. We first develop a comprehensive measure of the strength of such bans, and document a large heterogeneity along this dimension. Using a shift-share instrument combining the lending ban strength measure and timing with borrower-bank relationships, we document that divestment affects the financing and operation of coal assets. We observe large effects of the policies on coal firm loan issuances, as well as on their outstanding debt and total assets. Substitution between divesting lenders and non-divesting ones, as well as with bond and equity issuances, appears to be limited. Coal power plants owned by firms exposed to bank divestment policies are more likely to be retired.