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

Format:Print
| Language:English
| Pages:45

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.