Title: The role of biodiversity risk in shaping bank lending decisions Authors:  Karoline Bax - Technical University of Munich (Germany) [presenting]
Aida Cehajic - Technical University of Munich (Germany)
Abstract: The aim is to examine the extent to which banks incorporate firm-level biodiversity risk into their lending decisions, both in terms of loan pricing and loan volume adjustments. We use a comprehensive syndicated loan market dataset that captures lender-borrower relationships and allows for matching with firm-level biodiversity risk measures. Beyond employing existing biodiversity risk measures, we extend the methodology by developing a more granular text-based biodiversity risk measure. This novel metric is constructed using cosine similarity of textual embeddings, allowing for a nuanced assessment of biodiversity-related corporate disclosures. Furthermore, we explore potential transmission mechanisms through which biodiversity risk is reflected in lending decisions, analyzing whether banks explicitly price biodiversity risk or adjust credit supply based on borrowers' exposure to biodiversity-related vulnerabilities. We examine whether bank location, UNEP-FI membership, and borrower characteristics, such as low ESG scores and environmental violations, affect lending behavior. While we find clear evidence that banks penalize biodiversity risk through higher spreads and lower loan volumes, the underlying channels remain inconclusive.