The green banking gap: How bankability, business models, and regulations challenge banks’ decarbonisation

In Europe, banks have been slow to increase green lending while they continue to finance high-GHG-emitting activities, leading to a ‘green banking gap’. Based on 88 interviews, we argue that explanations for the green banking gap can be grouped into three broad categories: bankability, business model, and regulation. First, there are not many green firms and projects that meet banks’ desired risk/return profile, while high-GHG-emitting activities remain bankable. Second, there are constraints to decarbonise banks’ portfolios arising from the change in banks’ business model in recent decades, making (green) corporate and project lending less important. Even when they lend, the characteristics of the lending process imply a bias towards high-GHG-emitting firms, as balance sheets are locked in old loans and banks prioritise long-term relationships with their clients. Finally, there are constraints on green lending and a lack of disincentives to high-GHG-emitting lending arising from financial and sustainability regulations and overall policy uncertainty.