International Research Seminar in Finance: Climate Risk, Bank Lending and Monetary Policy

On 3 March 2025, Professor Marco Pagano of the University of Naples. Italy, delivered an International Research Seminar in Finance (IReS) titled “Climate Risk, Bank Lending and Monetary Policy”. The seminar addressed key questions concerning the integration of climate risk into bank lending practices and the interaction between climate considerations and monetary policy effectiveness.

Professor Pagano explored whether banks incorporate climate risk into their lending decisions and, crucially, whether this consideration extends beyond current mitigation measures to include firms’ future commitments to reducing carbon emissions. He also examined the influence of monetary policy—particularly monetary tightening—on banks’ risk assessment and lending behaviour in the context of climate risk. Specifically, the discussion focused on whether tighter monetary policy discourages lending to high climate-risk firms by raising their borrowing costs, or conversely, whether it disproportionately affects firms with lower climate risk due to pre-existing financial constraints.

Empirical findings presented during the seminar demonstrated that banks tend to charge lower interest rates to firms with lower carbon emissions as well as to those that have committed to future decarbonisation. This indicates that both present environmental performance and forward-looking climate commitments influence credit conditions. Moreover, the effect is more pronounced among banks that have publicly committed to decarbonisation goals. In relation to monetary policy, Professor Pagano presented evidence that monetary tightening results in greater increases in lending rates for “brown” firms—those with higher emissions and limited or no commitment to decarbonisation—than for “green” firms. This suggests that climate risk is increasingly being internalised in banks’ lending decisions, and that contractionary monetary policy exacerbates financing constraints for high-emission firms relative to their greener counterparts.