Green Financial Intermediation - From Demand to Impact (INTERACT)

Tasks

Achieving the Paris agreement goals to limit global warming by 2100 to well below 2 degrees Celsius compared to pre-industrial levels and contributing to the UN Sustainability Goals will require massive public and private investments. The increasing awareness within society of the need to mitigate climate change can have an indirect yet profound effect on financial flows.  However, since green preferences introduce a non-financial dimension into the investment process, the financial sector that traditionally focuses on risk and return may lack the tools for an efficient intermediation.

Aiming to address this, the EU Action Plan on Sustainable Finance and the definition of sustainability by the EU Taxonomy can be regarded as a milestone. As a result, financial market authorities are increasingly addressing the financial sector directly with climate-related regulation, while firms will prudently want to strengthen their decarbonization efforts. The interplay between the financial sector and firms, in turn, may provide firms with an incentive to increase their decarbonization efforts if their financing conditions depend on these.

The project provides a comprehensive analysis of all stage of financial intermediation:  it covers the process of green financial intermediation from investors’ demand and new regulations, via mechanisms that translate these into differential funding conditions for greener and browner investment project, to the climate impact of these projects. Among other things, we will investigate how new regulatory requirements affect
bank lending and thereby incentivize firms, including small and medium enterprises (SMEs), to improve their climate impact. This includes but is not limited to the EU Taxonomy, the Non-Financial Reporting Directive (NFRD) and the Corporate Sustainability Reporting Directive (CSRD) as well as the Sustainable Finance Disclosure Regulation (SFDR). 

Methods

Depending on the different subproject research questions, INTERACT aims to employ a mix of four complementary methodological approaches, namely (i) theoretical analyses, (ii) surveys, (iii) survey experiments and (iv) microeconometric analyses of survey, administrative, loan and balance sheet data. For the investigation of the effects of sustainable finance-related regulation in the EU, this may include regression discontinuity design (RDD) and difference-in-differences approaches.