ABSTRACT
A major concern in the current global debate over climate change policies is whether financial institutions can contribute to encouraging environmental improvements and then reduce carbon emissions. In this study, we examined the association between the intensity of carbon footprint of bank loans (CFBL) and the amount of carbon dioxide (CO2) emissions emitted from economic activities in Malaysia, using data from 2006 to 2018, with the ARDL model. The study found that the CFBL portfolios in the Malaysian banking industry has diverse associations with CO2 emissions that are emitted from economic activities. Particularly, the CFBL contributed significantly to increasing the CO2 emissions emitted from economic activities such as mining and quarrying, energy-producing products (MEE), water transportation (WT), retail and wholesale trade, and motor vehicle repairs (WRTRMV). In contrast, CFBL was found to have significantly decreased the CO2 emissions emitted from economic activities such as air transport (AT), construction (COT), and land transport and transport via pipeline (LTTP). To reduce climate risks and protect the environment, the study recommends that banks reallocate credit to green business initiatives and restrict lending to non-green economic activities. The study provides guidance and direction to policy makers, especially central banks, in evaluating banks’ environmental responsibilities towards climate change risk mitigation and empowering them to remain competitive globally.
