Mazzola (ESCP): ‘The credibility of climate policies shapes corporate lending and the green transition’

Climate policies can have a significant impact on access to credit and the green transition, but the measures adopted by different levels of government are not always aligned. In some cases, in fact, they may be in direct conflict. In such cases, explains Mazzola, ‘the transition risk also depends on which level of government has the final say’, and this has tangible implications for businesses. Returning to the case of the US, in the absence of comprehensive federal legislation, cities and states have moved in opposite directions. ‘Two identical firms may thus face different regulatory risks depending on their geographical location,’ says the professor. ‘Obviously, this conflict comes at a cost.’ For example, in the sample analysed by Mazzola and his colleagues, ‘the effect of pre-emption is concentrated in counties where residents are most in favour of emissions regulation – that is, where a local ban is more likely and state law significantly alters the outlook,’ says the expert - Municipal bans on gas in buildings, on the other hand, do not affect credit: as long as a state can override them, banks do not regard them as a lasting commitment.”

In Europe, too, there are different levels of government: the Union sets the objectives, the Member States transpose them into national law, whilst regions and local authorities implement the measures needed to achieve them. The problem arises when the various plans are not aligned. As a result, ‘the rules become less credible for investors and lenders’, explains Mazzola. An example of this dynamic, which closely affects Italia, is the ‘Green Homes’ Directive (Directive (EU) 2024/1275), which provided for the phasing out of incentives for stand-alone gas boilers from 2025. The country “has abolished tax relief for boilers fuelled exclusively by natural gas or LPG,” explains the professor, “but the European Commission has taken issue with the lack of an explicit and comprehensive ban, referring in particular to the ‘Conto Termico’ incentive scheme.”

Short- and long-term effects

The conflict between regulators can therefore have consequences that go beyond the formulation of climate policies, also influencing banks’ financing decisions. In this instance, ‘when the regulatory level that protects the use of gas prevails, banks offer better terms to the businesses that are most dependent on it’. Consequently, “sticking with existing technology thus becomes relatively more cost-effective than planning a transition, and the financial incentives for the transition are thereby weakened”, explains the expert. However, this dynamic presents a potential trade-off between short-term economic benefits and long-term consequences for the transition. Indeed, in the US states that have implemented pre-emption laws, looking at the present situation, ‘employment is growing in the sectors most dependent on gas and loans are not showing an increase in defaults’ and, ‘from a banking perspective, these appear to be sound loans’. The picture changes, however, when the transition is considered as a whole.

‘Credit does not merely redistribute resources’ amongst businesses, ‘but helps to amplify the political signal’. Firstly, on the economic front, “in countries that adopt these laws, gas consumption rises, particularly for industrial use,” says the professor. Added to this is a political factor: “the more businesses and jobs in a country depend on gas, the more difficult it will become to introduce restrictions in the future”. In this way, according to Mazzola, “bank credit can consolidate dependence on gas over time, but also make the political choice that promoted it more enduring”. The future trajectory of climate policies also affects the risk of investments becoming obsolete, particularly those linked to fossil-fuel-powered technologies. The overall picture therefore remains ambiguous: “What is profitable for the bank does not necessarily coincide with what is desirable for the climate,” observes Mazzola.

The European Commission estimates that around 174 billion in additional investment will be needed by 2030 to meet the targets of the National Energy and Climate Plan, and a large proportion of these funds will have to come from banks, particularly for SMEs. According to estimates by the World Economic Forum, these businesses in fact generate around two-thirds of corporate emissions and account for the majority of new jobs, and ‘in Europe, and in Italia in particular, these companies are heavily reliant on bank credit’, explains Mazzola. Since they often invest in durable assets that are difficult to repurpose, “their technological choices – for example, those relating to the replacement or maintenance of a plant – depend heavily on financing conditions,” observes the professor, though information also plays a key role. ‘In our research,’ he says, ‘we were able to reconstruct companies’ exposure to pre-emption using energy consumption data derived from audits carried out by the US Department of Energy.’ In Europe too, “the quality of this data affects banks’ ability to distinguish between companies that are more and less exposed”. With higher thresholds for sustainability reporting, banks will have to derive climate exposure from other sources for many medium-sized companies.

Overall, credit ‘can amplify the direction set by climate policies’. Indeed, as the scientific literature shows, ‘when the transition path appears credible, banks tend to direct a greater proportion of their lending towards clean technologies’, explains Mazzola. Conversely, according to the findings of the professor’s study, ‘when climate policies take a step backwards, the opposite happens: lending shifts towards businesses dependent on fossil fuels’. Therefore, ‘credit,’ the professor concludes, ‘can accelerate or slow down the transition, depending on the direction of policies – climate-related or otherwise – that banks deem credible’.