This paper examines whether green financing creates value for banks and alters their risk profiles, and how government incentives and corporate governance shape these outcomes. Focusing on Bangladeshi banks, the study compares bank performance, costs and risk before and after the 2015 green financing policy that introduced financial incentives for compliant banks. It aims to determine whether green lending without incentives enhances performance, whether policy support changes its effectiveness and whether green lending increases bank risk. The paper further investigates the role of CEO power, institutional ownership and board size in moderating the performance effects of green financing.
Using bank-level data and a difference-in-difference frameowrk, this paper examines the impact of green financing on the performance and risk of Bangladeshi banks before and after the introduction of a government green financing policy in 2015 that included financial incentives for compliant banks. The paper also examines whether CEO power and governance structure moderate this impact.
The study finds that green lending is positively associated with bank performance for the full sample. However, before the 2015 green financing policy, banks engaging in green lending exhibited higher operating costs and lower performance than non-green banks. After the introduction of the policy and its associated financial incentives, compliant banks significantly outperformed non-compliant banks, indicating that green policies without incentives may not create value. Post-policy green lending is also linked to improved bank credit ratings, suggesting no increase in bank risk. These findings imply that CEOs' aversion to green lending found in prior studies is not driven by risk–return considerations. Additionally, CEO power weakens the positive performance effects of green lending, while institutional ownership and larger boards mitigate this adverse impact.
This study offers novel evidence on the value and risk implications of green financing by exploiting the introduction of a government's policy with financial incentives. Unlike prior research that treats green lending as inherently value-enhancing, the paper distinguishes between pre- and post-policy periods, showing that green lending creates value only when supported by incentives. It further contributes by demonstrating that green lending does not increase bank risk, as reflected in improved credit ratings, thereby challenging risk-based explanations for CEOs' aversion to green finance. Finally, the study uniquely highlights how CEO power and corporate governance mechanisms jointly shape green financing outcomes.
