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Pricing carbon risk: Investor preferences or risk mitigation?

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  • Kleimeier, Stefanie
  • Viehs, Michael

Abstract

Do banks charge an environmental premium when lending to publicly listed firms? Using a unique and comprehensive database on carbon emissions, we find that higher carbon emissions are associated with higher loan spreads. This effect exists for loans arranged by all lenders suggesting that spread premia are driven by environmental risks rather than investor preferences. Consistent with ex-post risk, companies without appropriate board-level responsibility pay higher spreads. While countries might introduce effective legislation to mitigate the effects of climate change, our results indicate that there is scope for a market-based solution to complement explicit environmental regulation.

Suggested Citation

  • Kleimeier, Stefanie & Viehs, Michael, 2021. "Pricing carbon risk: Investor preferences or risk mitigation?," Economics Letters, Elsevier, vol. 205(C).
    • Handle: RePEc:eee:ecolet:v:205:y:2021:i:c:s0165176521002135
    DOI: 10.1016/j.econlet.2021.109936
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    References listed on IDEAS

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    6. Kirschenmann Karolin, 2022. "The EU Taxonomy’s (Potential) Effects on the Banking Sector and Bank Lending to Firms," The Economists' Voice, De Gruyter, vol. 19(2), pages 275-283, December.
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    8. Xiaohui Chen & Wen Chen & Xiaoxiang Wang, 2024. "Regional carbon efficiency and corporate risk-taking," Economic Change and Restructuring, Springer, vol. 57(3), pages 1-30, June.
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    Keywords

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    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • Q51 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Valuation of Environmental Effects
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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