N°24-40: Do Banks Price Environmental Risk? Only when Local Beliefs are Binding!

We study the impact of the environmental footprint and the biodiversity risk exposure of firms on their cost of bank credit. We document that at loan origination banks charge higher rates to firms with more environmental damage, especially when weakly capitalized and when the firms operate in "greener" states with low denial and during periods with more negative environmental news. Biodiversity risk is also priced, and more so when public interest intensifies. Following the Trump withdrawal from Paris, banks reduce environmental risk pricing in "browner" states. In sum, environmental risk pricing in bank lending is also driven by local beliefs and attitudes.