How environmental performance affects firms’ access to credit: Evidence from EU countries

Abstract

In response to climate change and environmental degradation, the European Union has recently proposed a long-term strategy targeting a climate-neutral economy by 2050.

Sustainable finance plays a crucial role in reducing a country's production-generated emissions since limited access to credit hampers firms from investing in pollution abatement technology. Additionally, high collateral requirements may force firms to replace pollution abatement investment with tangible assets, which are often preferred as collateral in debt financing. Using survey data from firms in ten EU member states, this study investigates the impact of a firm's environmental performance on bank lending decisions and collateral requirements. Our empirical findings suggest that, for the sample countries as a whole, eco-friendly firms are more likely to receive a line of credit and less likely to be imposed collateral requirements. For collateralized loans, desirable environmental performance reduces the odds of high collateral value relative to loan size. Sustainable finance may depend on the levels of economic/financial market development. There are seven EU new member states (NMS) in our sample. Although financial institutions in the EU NMSs reward eco-friendly firms when they make lending decisions, they are less likely to consider environmental performance when imposing collateral requirements. These empirical findings hence provide insightful policy implications for improving the practices of sustainable finance.