The shift to a low-carbon economy is as challenging as it is urgent. Reducing the environmental footprint of firms will require large-scale investments in energy efficient and less polluting technologies.
Research by Ralph De Haas, Ralf Martin, Mirabelle Muûls and Helena Schweiger, to be presented at the virtual congress of the European Economic Association in August 2020, suggests that firm-level credit and managerial constraints slow down firm investment in more energy efficient and less polluting technologies.
Moreover, their findings suggest that credit constraints also slow down firms’ ability to reduce the emission of greenhouse gases and other pollutants: the decline in emissions was smaller in localities where banks had to deleverage more in the wake of the global financial crisis.
The bulk of these green investments is needed in developing countries, where nearly all of the growth in energy demand and carbon emissions over the next three decades will take place. Unfortunately, both financial and managerial constraints tend to bind more in poorer countries and may therefore seriously hamper efforts to reduce the carbon intensity of firm-level production.
The new study uses the European Bank for Reconstruction and Development (EBRD) – European Investment Bank (EIB) – World Bank (WB) Enterprise Survey firm-level data on a representative sample of almost 12,000 firms across 27 emerging markets at varying levels of economic and financial development.
The data come from in-depth, face-to-face surveys with the main manager of each firm. The surveys provide information on credit constraints as well as firms' green management practices and investments.
Green management is defined in terms of firms’ strategic objectives regarding the environment and climate change, their managerial structure, their setting of targets (if any) related to energy use and pollution emissions and the way that they monitor such targets.
Green investments include, among others, investments in the on-site generation of green energy; improvements of energy and water management; and measures to control air pollution or to increase the energy efficiency of production lines.
Firm-level data are combined with geo-coded information on the bank branches that surround each firm from the EBRD Banking Environment and Performance Survey (BEPS). This allows the authors to create granular proxies for exogenous differences in local credit conditions in the aftermath of the global financial crisis.
They use these variables as instruments to estimate the causal effect of credit constraints and green management quality on green investments. The results show that credit constraints slow down firms’ investments in green and carbon abatement technologies. But managerial constraints hold back green investments as well.
If credit constraints prevent firms from investing in greener (more energy efficient) production processes, then one might expect that, perhaps with some delay, they also slow down firms’ ability to reduce the emission of greenhouse gases and other pollutants.
To address this issue, the authors use the European Pollutant Release and Transfer Register (E-PRTR) data on the change in greenhouse gas emissions and other air pollutants of 1,819 Eastern European industrial facilities during 2007-2017. For identification, they again exploit exogenous differences in local credit conditions in the aftermath of the global financial crisis.
The results show that although there was a secular decline in pollution during this period, this decline in emissions was smaller in those localities where banks had to deleverage more in the wake of the global financial crisis. This suggests that credit constraints not only slowed down firms' green investments but also their ability to produce in a less polluting way.
Taken together, the findings provide evidence for an important channel through which persistent negative environmental impacts of financial crises may come about, namely credit constraints preventing firms from investing in green technologies and carbon abatement measures that could reduce their pollutant emissions.
These findings are clearly at odds with those who view financial crises as events that may have an environmentally cleansing effect. Instead, the authors show that even temporary disruptions in the supply of external finance can have long-lasting negative implications for the carbon intensity.
ENDS
Authors:
Ralph De Haas (European Bank for Reconstruction and Development, CEPR and Tilburg University)
Ralf Martin (Imperial College Business School and CEP)
Mirabelle Muûls (Imperial College Business School and CEP)
Helena Schweiger (European Bank for Reconstruction and Development)
Contact details:
Helena Schweiger: schweigh@ebrd.com
Twitter: @helenaschweiger; @ralphdehaas; @mondpanther; @MirabelleMuuls