Do banks price the environmental risks arising from their borrowers’ chemical pollution? We combine loan-level credit register data (AnaCredit) for 832 euro area banks with facility-level emissions of around 5,000 major industrial polluters and geospatial information on protected areas and surface-water quality. We find that banks adjust lending conditions, through loan-to-value ratios and interest rates, in line with EU pollution and biodiversity protection legislation. These adjustments concentrate on firms with large pollution footprints near biodiversity-protected areas and on firms contributing to failures of Environmental Quality Standards in downstream surface waters. The former is associated with banks’ adoption of biodiversity policies and public commitments to the Equator Principles, the latter with regulatory risk. The results shed light on how environmental legislation is transmitted into credit conditions and inform financial supervisors on how banks manage risks associated with the EU’s zero pollution ambition.
