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The Economics of Net Zero Banking

Author

Listed:
  • Adair Morse

    (Haas School of Business, University of California, Berkeley, California, USA
    National Bureau of Economic Research, Cambridge, Massachusetts, USA)

  • Parinitha Sastry

    (The Wharton School, University of Pennsylvania, Philadelphia, Pennsylvania, USA)

Abstract

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.

Suggested Citation

  • Adair Morse & Parinitha Sastry, 2025. "The Economics of Net Zero Banking," Annual Review of Financial Economics, Annual Reviews, vol. 17(1), pages 343-361, November.
    • Handle: RePEc:anr:refeco:v:17:y:2025:p:343-361
    DOI: 10.1146/annurev-financial-112923-021641
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    Keywords

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    JEL classification:

    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • M14 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Corporate Culture; Diversity; Social Responsibility
    • Q51 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Valuation of Environmental Effects

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