Asli Demirguc-Kunt, Alvaro Pedraza, Fredy Pulga, and Claudia Ruiz-Ortega
What is the response of bank foreign subsidiaries to climate policy in their host countries? This paper finds that global banks with high environmental performance increase their presence in countries after local authorities strengthen their climate-related actions. Through their foreign subsidiaries, these banks expand their credit by 4.6 percent following an increase of one-standard deviation in the host country’s climate policy index. Importantly, the paper does not find evidence that banks with low environmental scores exit in response to climate initiatives. The findings show that strengthening climate policy might be a win-win strategy for policymakers—in addition to addressing carbon emission reduction, climate-related initiatives also appear to attract foreign capital from lenders with strong preferences for green assets.