Carbon Footprint of Bank Loans: Is Europe Really Going in the Green Direction?

Abstract

Ambitious environmental goals set by the EU are striving to make Europe a global leader in decarbonizing the whole planet Earth. Based on the euro area data, we investigate whether the banking sector actively supports these initiatives via its loan portfolio carbon footprint. Our main conclusion is that during the observed period, the banking sector acts as a free rider, with emission reductions occurring independently within corporate economic sectors. Spatial intermediation in the context of the green financing paradox does not play a key role. To aid policy-maker decisions, we propose the Composite Carbon Footprint Indicator (CCFI) as a socio-economic tool for classifying economic sectors. By combining GDP and employment data, we can differentiate between economic sectors based on the risk/reward ratio, reflecting the environmental cost of economic expansion and employment goals.