Green firms and default risk: Results from a preferential capital requirement programme

Abstract

This study evaluates the credit risk of green firms in a preferential capital requirement programme. We utilise loan-level data from a uniquely implemented, taxonomy-based programme from Hungary, applying logistic regressions and survival analysis techniques. We observe significantly reduced credit risk for green firms, even after controlling for a broad set of observed borrower, loan, sector, and time characteristics. Firms with renewable energy and electromobility loans exhibit 1.5 and 1.7 percentage points lower yearly probability of default respectively in the covered period. Models incorporating green characteristics predict a substantially lower credit risk for green firms compared to models excluding green characteristics. These results are economically significant and robust to model specifications including bank-time fixed effects, alternative definitions of green firms and varying default definitions. Our estimates imply that green firms’ lower probability of default can potentially rationalize a reduction of several percentage points in capital requirements.