Substantial investments in renewable energy technology are needed to achieve sustainable development goals, reduce reliance on fossil fuels, and ensure access to clean and stable energy. However, securing funding for these initiatives is challenging, relying heavily on extensive financial support from banks. In response to this challenge, this article establishes a relationship between market-based default risk measures, such as Distance-to-Default (DD) and Distance-to-Capital (DC), and the proportion of renewable energy in a country's total energy supply. We collected data from a sample of 1,373 international banks across 27 countries from 2009 to 2022, using an ordinary linear fixed-effect model. After reviewing the literature, we categorized the study into two homogeneous sub-panels based on income group classification (developed or emerging countries).
Overall, our results indicate that as countries accelerate their transition towards renewable energy sources, there is a correlated decrease in the likelihood of bank defaults. We observe a decline in bank vulnerability as nations with high CO$_2$ emissions embrace diversified energy matrices. Additionally, factors such as economic growth and bank size play pivotal roles in determining default risk. These trends remain consistent when examining developed countries. However, our findings also highlight a contrasting scenario in emerging economies, where the energy transition is associated with heightened risk for banks. To ensure the robustness of our findings, we conducted several tests, all of which validated our results. In conclusion, our study underscores the crucial role of a banking system in facilitating investments in renewable energy.
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