ESG Strategist - Assessing the impact of joining the NZBA on banks’ bond spreads
In April 2021, the United Nations Environment Programme Finance Initiative (UNEP FI) formed the Net-Zero Banking Alliance (NZBA), an initiative that brings together banks across the globe committed to align their lending, investment, and capital markets activities with net-zero greenhouse gas emissions by 2050.
By signing the NZBA, banks are committing, amongst other things, to (1) transition the operational and attributable GHG emissions from their lending and investment portfolios to align with pathways to net-zero by 2050 or sooner, and, (2) within 18 months of joining, set targets for 2030 or sooner, and a 2050 target, with intermediary targets to be set every 5 years from 2030 onwards.
By committing to a net-zero pathway and subsequently setting decarbonization targets, a bank is not only signalling its commitment to sustainability to investors, but is also committed to decrease its exposure to climate risks. This can be done by either divesting from polluting companies or by assisting its high-emitting clients to reduce their own emissions. As such, signing to the NZBA might be supportive of the bank’s outlook, and, as consequence, of the banks’ bond spreads.
In this note, we aim to understand whether signing to the NZBA (referred to as “the event” from now onwards) had an effect on signatory banks’ bond spreads. Using a fixed effects model, we calculate the direction and significance of signing to the NZBA on banks’ bond spreads. The note follows as: in the second section, we explain the sample and the methodology. In the third section, we present the results and interpret them, and elaborate on the limitations of our research. And, in the final section, we conclude.
