This paper examines the effects of climate policy and banks’ voluntary environmental commitments on the supply of cross-border green lending. We focus on heterogeneous effects across debt instruments—such as green and sustainability-linked loans (SLLs)—and across areas with different income levels. Using a sample of cross-border syndicated loans, we find that banks’ participation in cross-border green loans and SLLs behaves differently than in conventional loans. While the latter increases when the lender’s country adopts stricter climate policies, participation in green lending abroad does not, and in the case of green loans, it declines significantly. Moreover, the retreat from cross-border green lending is particularly pronounced when the lender has made public environmental commitments or when borrowers are located in relatively lower-income countries. Our findings underscore the limitations of green loans and SLLs in promoting green finance in developing regions, suggesting that domestic incentives and reputational concerns may discourage banks from extending such financing abroad, even when the environmental benefits of such operations could be more impactful.
