The Influence of Climate Initiatives on Capital Structure: The Green Halo Effect

ABSTRACT

This paper examines the impact of participation in three climate initiatives—Science Based Targets initiative (SBTi), Carbon Disclosure Project (CDP) and Net Zero Banking Alliance (NZBA)—on the capital structure of financial institutions. Using a Propensity Score Matching approach, we analyse the changes in capital and leverage ratios following climate commitments. We find that CDP participation leads to reductions in both risk‐weighted and non‐risk‐weighted capital ratios, consistent with a ‘green halo effect’ whereby stakeholders perceive lower risk. SBTi participants show increased asset density, suggesting a shift towards riskier exposures, while NZBA commitments exhibit no significant impact. These results highlight the signalling power of specific climate initiatives and their implications for prudential oversight.