Bank Credit Risk and Biodiversity
About this event
Our research seminars provide a forum for academics to present and discuss their latest work. Academics come from both within the Business School and from external institutions. They share insights from their research or a paper in progress. This is followed by discussion and questions from the audience. The series is open to staff and students from across the University.
Host
Speaker
Dr Nikolaos Papanikolaou, Senior Lecturer in Finance at Newcastle University Business School
Abstract
Biodiversity has become a critical topic in sustainable finance, reflecting increasing regulatory and stakeholder pressure on financial institutions to address nature-related risks. This paper explores the relationship between banks’ biodiversity-related activities and credit risk by analysing both disclosure narratives and institutional actions. Employing GPT-4 to perform sentence-level sentiment analysis of biodiversity-related disclosures in banks’ annual reports, we assess the tone of communication concerning biodiversity. In this context, we develop a composite Biodiversity Conservation Actions Index based on banks’ operational practices and strategic commitments related to biodiversity. Our findings indicate that banks’ biodiversity-related disclosures are positively associated with actual loan quality and lower short-term expected credit risk. However, when negative sentiment predominates over positive sentiment in these disclosures, banks tend to demonstrate higher actual loan quality alongside increased long-term expected credit risk. Furthermore, biodiversity-related actions are consistently associated with reduced credit risk from both backward-looking and forward-looking perspectives.