LUCKNOW: Researchers at Indian Institute of Management Lucknow have conducted a study providing insights into how banks’ lending patterns toward carbon-intensive sectors shape their long-term financial health and operational efficiency.
Published in the prestigious Journal of International Financial Markets, Institutions & Money, the findings of this research highlight that sustainability and financial performance are interconnected, and it is essential to align financial strategies with the global transition to a low-carbon economy.
While banks do not emit carbon directly, they indirectly play a role by financing high-carbon industries such as fossil fuels and heavy manufacturing. The study conducted by Prof. Vikas Srivastava, ONGC Chair Professor, Prof. Sowmya Subramaniam, Associate Professor, Finance and Accounting, and Vidya Mahadevan, research scholar at IIM Lucknow, examined whether such lending behaviour affects banks’ own performance over time, specifically in terms of efficiency, profitability, and cost structures.
By assessing a panel of 158 banks across 26 countries, the research team found that banks with greater exposure to carbon-intensive sectors tend to become less efficient over time. This is mainly because these industries face increasing regulatory scrutiny and policy shifts in a low-carbon transition, making them riskier borrowers. This results in banks incurring higher credit risk, leading to increased monitoring and recovery costs when loans turn non-performing.
Commenting on the study, the authors stated, “Financial institutions are exposed to transition risks that are not immediately visible in traditional risk assessment. This research underlines the importance of factoring in sectoral exposure from a long-term perspective, especially in the context of evolving climate policies.”
A key feature of the study is its introduction of a novel measure of carbon-sector exposure, which combines loan concentration with sectoral carbon intensity (measured as emissions per unit of gross value added). This approach enables a more precise assessment of the risks embedded in banks’ lending portfolios.
The research highlights the importance of strong capital buffers. More capitalised banks can absorb the risks of carbon-intensive lending, limiting the efficiency impacts caused by climate change.
It carries implications for both industry and policymakers:
- It proposes that banks to rethink their lending portfolios while taking long-term risks into account.
- It shares actionable insights for regulators to prepare effective climate-risk and capital policies.
- It reinforces the idea that transitioning toward greener portfolios is good for both the environment and business.
Along with demonstrating the inter-bank and intra-bank structural similarities, the study identifies key insights into how banks’ lending patterns toward carbon-intensive sectors shape their long-term financial health.
