Session 11: Climate Finance and Banking

Are depositors sleepy? We challenge the traditional view of depositor sleepiness by introducing a new notion, depositor alertness, and find supporting evidence leveraging transaction-level data from over a million U.S. depositors across major U.S. banks. Depositors shift their deposits across bank accounts more actively when the payment technology linked to their accounts is more efficient, which we define as the payment channel. Furthermore, depositors facing higher payment frictions are also more attuned to interest rate risk and shift their deposits more actively, which we define as the interest risk channel. Depositor alertness is particularly pronounced during periods of rate hikes but diminishes when rates fall. We further draw causal evidence using a novel instrument: the exogenous exposure to fast payment technologies reduces transfer frictions, which consequently heightens depositor alertness. Our findings have significant policy implications, highlighting the impact of depositor behavior on bank funding costs and risks, especially amidst rapid developments in new payment technologies and during times of monetary tightening.

US banks predominantly use uniform deposit rate setting policies, particularly the largest banks. Uniform rate setting ignores local market concentration, and is therefore inconsistent with the identification strategy used to provide cross-sectional evidence of the deposit channel. Our reexamination of the various components of the deposit channel finds little evidence of a deposit price driven deposit channel. We find evidence of substantial funding substitution in the aggregate. Several reliable relationships in the cross section of banks may not aggregate because of the extreme bank size distribution and the differential behavior of small and large banks.

The deposit business differs at large versus small banks. We provide a parsimonious model and extensive empirical evidence supporting the idea that much of the variation in deposit-pricing behavior between large and small banks reflects differences in preferences and technologies. Large banks offer superior financial services but lower deposit rates, and locate where customers value their services. In addition to receiving a lower level of deposit rates on average, customers of large banks also exhibit lower rate elasticities. As a result, despite the fact that the locations of large-bank branches have demographics typically associated with greater financial sophistication, large-bank customers earn lower average deposit rates. Our explanation for deposit pricing behavior challenges the idea that deposit pricing is mainly driven by pricing power derived from the large observed degree of concentration in the banking industry.

We explore the economic effects of biodiversity loss by developing an ecologically-founded model that captures how different species interact to deliver the ecosystem services that complement other factors of economic production. Aggregate ecosystem services are produced by combining several non-substitutable ecosystem functions such as pollination and water filtration, which are each provided by many substitutable species playing similar roles. As a result, economic output is an increasing but highly concave function of species richness. The marginal economic value of a species depends on three factors: (i) the number of similar species within its ecosystem function, (ii) the marginal importance of the affected function for overall ecosystem productivity, and (iii) the extent to which ecosystem services constrain economic output in each country. Using our framework, we derive expressions for the fragility of ecosystem service provision and its evolution over time, which depends, among other things, on the distribution of biodiversity losses across ecosystem functions. We discuss how these fragility measures can help policymakers assess the risks induced by biodiversity loss and prioritize conservation efforts. We also embed our model of ecosystem service production in a standard economic model to study optimal land use when land use raises output at the cost of reducing biodiversity. We find that even in settings where species loss does not reduce output substantially today, it lowers growth opportunities and reduces resilience to future species loss, especially when past species loss has been asymmetric across functions. Consistent with these predictions of our model, we show empirically that news about biodiversity loss increases spreads on credit default swaps (CDS) more for countries with more depleted ecosystems.

This project analyzes how a principal can motivate an agent to conserve rather than exploit a depletable resource. This dynamic problem is relevant for tropical deforestation as well as for other environmental problems. It is shown that the smaller is the agent's discount factor (e.g., because of political instability), the more the principal benefits from debt-for-nature contracts compared to flow payments (in return for lower deforestation). The debt-for-nature contract combines a loan to the agent with repayments that are contingent on the forest cover.

Renewable portfolio standards (RPS), a widely-used climate policy mandating that utilities switch from fossil fuels to renewables, increases the volatility of affected firms’ asset-value distribution. Our approach to quantifying transition risk combines reduced-form estimates from a new within-jurisdiction identification strategy with structural methods. RPS reduces the emissions of affected firms but not their profitability due to a pass through of higher renewable costs to consumers. Nonetheless, bond markets charge these firms larger credit spreads because the transition raises the variability of their electricity prices, resulting in higher asset volatility. Higher asset volatility in turn reduces affected firms’ investment in total electricity capacity, and lowers welfare.

We study the implications of model uncertainty in a climate-economics framework with three types of capital: “dirty” capital that produces carbon emissions when used for production, “clean” capital that generates no emissions but is initially less productive than dirty capital, and knowledge capital that increases with R&D investment and leads to technological innovation in green sector productivity. To solve our high-dimensional, non-linear model framework we implement a neural-network-based global solution method. We show there are first-order impacts of model uncertainty on optimal decisions and social valuations in our integrated climate-economic-innovation framework. Accounting for interconnected uncertainty over climate dynamics, economic damages from climate change, and the arrival of a green technological change leads to substantial adjustments to investment in the different capital types in anticipation of technological change and the revelation of climate damage severity.

We use administrative credit registry data from Europe to study the impact of voluntary lender net zero commitments. We have two sets of findings. First, we find no evidence of lender divestment. Net zero banks neither reduce credit supply to the sectors they target for decarbonization nor do they increase financing for renewables projects. Second, we find no evidence of reduced financed emissions through engagement. Borrowers of net zero banks are not more likely to set decarbonization targets or reduce their verified emissions. Our estimates rule out even moderate-sized effects. These results highlight the limits of voluntary commitments for decarbonization.

We examine the impact of the European Union’s Sustainable Finance Disclosure Regulation (SFDR) on mutual fund flows and the sustainability of their investments. The SFDR formally classifies investment funds into three categories to increase transparency and curb greenwashing: those with a sustainable investment objective (Article 9 or "dark green"), those that promote environmental characteristics (Article 8 or "light green"), and others (Article 6). Utilizing a difference-in-differences research design, we find that the SFDR had a negligible effect on mutual fund flows and the sustainability of funds’ underlying portfolios. The introduction of the SFDR did not result in higher flows into either light or dark green mutual funds, nor did it significantly alter the sustainability of their portfolios. The disclosures were ineffective because they did not produce new information for investors; they were redundant and difficult to interpret. Before the European Union introduced the SFDR disclosures, investors could already identify sustainable funds based on fund names and sustainability mandates. In an experimental setting, we demonstrate that European investors need help understanding the SFDR disclosures and find that making the information more intuitive could enhance the SFDR’s impact.

We study who owns coal power plants - the largest single source of carbon emissions - in Europe. A sharp increase in private firms' ownership was met by a large decline in public equity ownership. This decline was not driven by public equity investors selling plants, but by their scaling down of plants quickly. State investors played a crucial role, selling to private firms and slowly scaling down their plants. We calibrate a model in which asset owners vary in how they value externalities. Nationalization by state investors that value social factors (jobs, "energy security") can hinder "green finance" in decreasing emissions.