Pricing nature across borders: Global banks’response to nature-linked financial policies

This paper examines how nature-related financial policies (NRFPs) in the home countries of global banks impact the pricing and terms of cross-border credit to firms that significantly affect biodiversity. Utilizing granular loan-level data from Colombian firms, a "megadiverse" country with high biodiversity risk, the authors analyze the interactions between stricter NRFPs and firm-level exposure to biodiversity loss. The study incorporates a novel, cross-country index of NRFPs, which captures a range of policies, from disclosure requirements to prudential regulations aimed at addressing environmental risks, including biodiversity degradation.
The findings reveal that implementing stricter NRFPs in global banks' home countries leads to notable adjustments in the terms of cross-border loans to firms with high biodiversity exposure. Specifically, global banks charge higher interest rate spreads and offer longer loan maturities to firms with significant biodiversity footprints. The magnitude of these effects is economically significant: a one-standard-deviation increase in the NRFP index leads to an approximate 16 basis-point increase in interest rate spreads and a six-month extension in loan maturities. Importantly, however, the volume of cross-border credit granted remains unaffected, suggesting that banks are adjusting the terms of lending rather than reducing credit supply altogether.
The study distinguishes between different types of NRFPs and finds that the effects are most pronounced for soft regulatory tools, such as voluntary disclosure requirements and principles-based frameworks. This suggests that even non-mandatory policies can influence global financial practices by prompting banks to internalize biodiversity-related risks. The research further explores how banks' risk assessments are shaped not only by current biodiversity degradation but also by potential future risks, indicating that environmental concerns are increasingly factored into lending decisions.
Overall, the study provides the first empirical evidence on the cross-border pricing of biodiversity-related risks in global lending markets. It highlights the role of international regulatory cooperation and the potential for NRFPs to influence financial market behavior, ensuring that environmental risks are priced into credit terms even in the absence of global coordination.