The Economics of Net Zero Banking

In this review, we explore the economic channels through which net zero banking might be consistent with lender business incentives. We begin with a framework wherein net zero lending may create value differentially from carbon-intensive lending through the channels of ( a ) credit risk and ( b ) lending returns conditional on risk (i.e., profit margins and lending book growth). When applying the framework as a lens to survey the literature, we uncover multiple roles for risk characteristics of lending opportunities being influenced by decarbonization. Moreover, decarbonization and green investment are tied to enhanced profitability through bank lending growth. We also highlight gaps in research knowledge and point out opportunities to connect the broader banking literature with climate finance. For instance, bank specialization in sector-specific risk and return advantages in bank lending may already be playing a role in the net zero transition. We conclude that net zero banking is an economic concept.