Carbon Intensity of Banks’ Loan Portfolio : A Good Basis for Comparison in Case of LowIncome Countries?

Szigel, Gábor (2022) Carbon Intensity of Banks’ Loan Portfolio : A Good Basis for Comparison in Case of LowIncome Countries? FINANCIAL AND ECONOMIC REVIEW, 21 (4). pp. 83-102. ISSN 2415-9271

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Abstract

In recent years, more and more credit institutions have been publishing the financed carbon footprint of their loan portfolio, enabling comparisons across institutions, for which investors and supervisors tend to use the carbon intensity of portfolios expressed as a proportion of the financed carbon footprint-to-total loan volumes. In this article, it is argued that such comparisons are unfair to low-income countries with low price levels, as they show the same activity as being more “carbon- intensive” in a low-income country than in a high-income country. The magnitude of such distortions can be significant, amounting to as much as 3 to 7-fold just within the European Union itself. As differences resulting from price levels do not actually represent differences in the carbon intensity of individual countries’ real economy and are also not an “own choice” of these countries (but rather a consequence of the Balassa-Samuelson effect), it is argued that the comparison of carbon intensity of different banks’ loan portfolios should be conducted using purchasing power parity adjustments – if not necessarily for investors, at least in the practice of financial supervisory authorities.

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