The impact of the Equator Principles on carbon financial markets: A case study based on China's green credit data

Abstract

Empirical research was conducted on green credit asset securitized products issued by commercial banks in 2014 and 2016. By establishing an Autoregression moving average (ARMA) model, the paper analyzed the relationship between the Industrial Bank's implementation of green credit asset securitization and its capital adequacy ratio. The results showed that the implementation of green credit asset securitization improved the bank's capital adequacy ratio and reduced its nonperforming loan ratio. Then, an empirical study based on carbon finance market operating mechanisms was conducted on Chinese commercial banks that have adopted the “Equator Principles” (EPs). An event study method was used to observe the impact of adoption on the banks. The results indicate that, after the industrial bank adopted the “Equator Principles '', its asset scale increased from 2006 to 2009, whereas its nonperforming loan ratio decreased from 2006 to 2011. After commercial banks adopted the “Equator Principles '', the cumulative average excess return reached its maximum on the eighth day after the event and was significantly higher than the industry average. It is important to promote the awareness of banks of their close links with environmental protection and encourage them to adopt the “Equator Principles” to significantly improve their risk management awareness, business processes, technical systems, and performance in the carbon financial market. By adopting the “Equator Principles”, developing financial derivatives for carbon trading, and promoting the development of structured products for carbon trading, commercial banks can contribute to environmental protection while gaining commercial benefits.

Keywords

• Equator principles
• Carbon finance
• Green credit
• ARIMA model
• Event study method