By Ralph De Haas and Helena Schweiger, EBRD Office of the Chief Economist; Ralf Martin and Mirabelle Muûls, Imperial College London


In line with commitments under the Paris Agreement, many countries are aiming to reach net-zero carbon emissions by 2050. This green transition will require massive corporate investments in cleaner technologies to reduce firms’ carbon footprint.

Against this background, large companies like Apple, BP and British Airways have recently committed to climate neutrality. In emerging markets, some firms have started to do the same – examples include PKN Orlen in Poland and Tesco Hungary. Unfortunately, not all companies, especially smaller ones, are able or willing to invest in cleaner technologies, creating a barrier to achieving the green transition.

We explore this in recent research by combining granular data on more than 11,000 firms across 22 emerging markets. We show that firms differ widely in their ability to access external funding and in the quality of their green management practices. We then explore whether firms with better access to credit and those with stronger green management invest more to reduce their environmental and climate footprint, and whether these investments help them do so.

We find that credit constraints reduce green investments while strong green management enhance them.

However, correlation does not imply causation. Past green investments may influence green management practices or credit constraints – rather than the other way around. To establish causality, we look at variables that affect credit constraints and green management – but not directly green investments or subsequent emissions. We follow two approaches here.

First, we focus on geographic variation in credit constraints across towns and cities. The supply of bank credit tightened significantly in emerging Europe after the global financial crisis, particularly after the 2011 regulatory stress tests imposed by the European Banking Authority. Deleveraging varied greatly across banks and therefore across localities, depending on where banks operate branches. Using data on the network of bank branches combined with bank balance sheet information, we construct local proxies for credit tightness in the direct vicinity of firms.

Second, we assume that management practices are at least partly determined by knowledge diffusion, which varies between areas. We expect, and indeed find, that managers who experience extreme weather events, or are informed about such events in their region, are more likely to be concerned about climate change and the environment. They will therefore be more amenable to green management practices. Hence, exposure to weather events becomes a driver we can use to explore the causal effect of management practices on green investments.

This approach confirms our earlier results: both credit constraints and green management significantly affect the likelihood of green investments (Figure 1). Credit constraints hinder most types of green investment, particularly those that require higher investment amounts, such as machinery and vehicle upgrades; improved heating, cooling or lighting; and green energy generation on site. They do not significantly reduce the likelihood of investing in air and other pollution control or energy efficiency measures, as these investments are potentially considered low-hanging fruit. Conversely, firms with good green management practices are more likely to invest in all types of green investment, with the effect larger for those more typically thought of in this category: waste and recycling; energy or water management; air and other pollution controls; and energy efficiency measures.

Barriers to net zero-01

Figure 1. Firm-level credit constraints, green management, and green investments. Sources: Multiple[1]

Note: This figure summarises the estimates of the relationship between firm-level green investments and respectively, firm-level credit constraints and the quality of green management.

If credit constraints and weak green management prevent firms from undertaking at least some green investment projects, then it could be expected that, perhaps with a lag, they can also hamper firms’ ability to reduce their air pollutant emissions. To investigate this, we use the European Pollutant Release and Transfer Register, which contains data on air pollutant emissions for a large number of Eastern European industrial facilities. Our estimates indicate that although there was an overall reduction in carbon emissions and air pollutants between 2007 and 2017, this decline was smaller in localities where banks had to deleverage more in the wake of the global financial crisis and, as a result, firms were more likely to be credit constrained. The effects are increasingly strong from 2011 onwards, signalling the potential lag between investment and its effect on emissions (Figure 2).

Figure 2: Local credit shocks and facility-level air pollution (2007-17). Sources: Multiple[2]

Note: This figure summarises the coefficient estimates of difference-in-difference regressions to explain the impact of local-level credit constraints on total air pollution (log kg) around industrial facilities. Local credit constraints are proxied by wholesale funding of all bank branches located in a circle with a 15km radius around the industrial facility, or, in the case of multi-facility firms, the parent company. The dots represent coefficient estimates of an interaction term between the reliance on wholesale funding in 2007 and individual year dummies during 2007-17.

Our results reveal how financial crises can slow down the process of decarbonising economic production. They demand caution against being excessively optimistic about the potential green benefits of the current economic slowdown, which – like any recession – has led to emissions reductions. Such short-term reductions might come at the cost of longer-term increases in emissions if they are associated with more severe credit-market frictions that delay or prevent green investment.

While our analysis lends support to policy measures that ease access to bank credit specifically for green investments, it also suggests that this might just be one element of a broader policy mix to stimulate such investments. Governments and development banks should also consider measures that could strengthen green management practices. This may include requirements to measure and report on environmental impacts or credit lines that are contingent on the adoption of better green management practices by firms.


This blog post is based on paper Managerial and Financial Barriers to the Net-Zero Transition.




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