Does transitioning away from GHG emitting companies hinder the capacity of banks to create shareholder value?

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This article investigates the capacity of banks to create shareholder value amidst regulators and stakeholders’ growing demands for reductions in financing to greenhouse gas emitting companies. The purpose of the study is to evaluate the shareholder value creation capacity of banks amidst transition risks resulting from reductions in loans from high greenhouse gas emitters. The study compares reductions in balance sheet corporate loans to returns on equity from income statements. The comparison is done for periods during which interest rates move downwards as a way of stress testing banks’ capabilities to generate shareholder value. A risk-return analysis is conducted to determine the rate of change in risk compared to shareholder value. A hypothesis-testing focus is used to test a value-creation proposition concerning the rate of change in corporate loans and return on equity. The results of the study strongly suggest that banks can create shareholder value when faced with loan reductions to high greenhouse gas emitting companies, even within constrained repricing conditions such as negative interest rate movements. Of the cases analyzed 88% have a similar outcome of value creation, which is supported by a rejection of the null hypothesis at p-value ≤ 0.05, justifying statistical significance. Furthermore, 53% of the changes in return on equity is explained by the changes in loans to greenhouse gas emitting companies. The study concludes that banks could still create shareholder value if they reduce funding towards high greenhouse gas emitting companies, provided they devise prudent strategic portfolio tilts in assets.

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    • Table 1. Level of perceived risk compared to a change in shareholder return for B1
    • Table 2. Second shareholder value-enhancing move for B2
    • Table 3. Risk-Return value destroying move for B2
    • Table 4. Risk-Return value creation move for B2
    • Table 5. Second Risk-Return combination of value creation for B2
    • Table 6. Risk-Return alternatives yielding value enhancement for B3
    • Table 7. Risk-Return moves yielding destruction in value for B3
    • Table 8. Alternative Risk-Return combinations for value creation in B4
    • Table 9. Descriptive analysis
    • Table 10. Descriptive results by bank
    • Table 11. Linear regression
    • Conceptualization
      Chekani Nkwaira
    • Data curation
      Chekani Nkwaira
    • Formal Analysis
      Chekani Nkwaira
    • Investigation
      Chekani Nkwaira
    • Methodology
      Chekani Nkwaira
    • Project administration
      Chekani Nkwaira
    • Writing – original draft
      Chekani Nkwaira
    • Supervision
      Huibrecht Margaretha van der Poll
    • Validation
      Huibrecht Margaretha van der Poll
    • Visualization
      Huibrecht Margaretha van der Poll
    • Writing – review & editing
      Huibrecht Margaretha van der Poll