Adoption of environmental practices and firm's access to bank credit

This paper examines whether climate-risk mitigation investments enhance firms' access to bank credit, with a particular focus on small and medium-sized enterprises (SMEs), which typically operate in information-opaque environments. We hypothesise that the adoption of mitigation practices serves as a signal of managerial quality, which is positively perceived by financial institutions. Using firm-level data from the Enterprise Survey conducted by the EBRD, EIB, and World Bank Group, we estimate an endogenous switching regression model to account for selection on both observables and unobservables. Firms are classified into mitigation-intensive and low-mitigation regimes based on their adoption of ten climate-related practices. Our results show that firms in the mitigation-intensive regime have a 38.6% higher probability of accessing credit compared to the counterfactual scenario, while firms in the low-mitigation regime would increase their probability by 28.9% if they adopted more mitigation measures. The difference between the treatment effects confirms positive selection into the mitigation-intensive regime and supports the signalling hypothesis.