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  • 2023
  • Working Paper

Can Finance Save the World? Measurement and Effects of Bank Coal Exit Policies

By: Daniel Green and Boris Vallée
  • Format:Print
  • | Language:English
  • | Pages:45
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Abstract

We study whether exit policies by financial institutions are an effective tool to address climate change, using bank policies targeting the coal industry around the world as a laboratory. In contrast to theories predicting divestment to be ineffective because capital is highly substitutable, we find large effects of these policies. We first develop a comprehensive set of measures of policy strength, and document a large heterogeneity along this dimension. Using a shift-share instrument combining bank-level policy strength and timing with borrower-bank relationships, we document that bank exit policies affect both the financing and operation of coal assets. We observe negative effects of the policies on coal firm debt issuance, as well as on their outstanding debt and total assets. Substitution from exiting lenders to non-exiting ones, as well as to equity issuance, appears to be limited. Coal power plants owned by firms exposed to bank exit policies are more likely to be retired, translating into lower CO2 emissions. However, the current aggregate impact of such policies is limited by their distribution: banks with larger coal lending businesses adopt fewer and weaker exit policies.

Keywords

Coal Power; Climate Change; Investment; Environmental Sustainability; Policy; Financing and Loans; Energy Industry; Banking Industry

Citation

Green, Daniel, and Boris Vallée. "Can Finance Save the World? Measurement and Effects of Bank Coal Exit Policies." Working Paper, June 2023.
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About The Authors

Daniel W. Green

Finance
→More Publications

Boris Vallee

Finance
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More from the Authors
  • Can Security Design Foster Household Risk-Taking? By: Laurent Calvet, Claire Célérier, Paolo Sodini and Boris Vallée
  • Seso Global: Building a Blockchain-enabled Property Marketplace in Nigeria By: Boris Vallee, Sean Bracken and Yang Yu
  • The Big Blue (B): Evolution By: Boris Vallee and Sean Bracken
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