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The pricing of carbon risk in syndicated loans: Which risks are priced and why?

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  • Ehlers, Torsten
  • Packer, Frank
  • de Greiff, Kathrin

Abstract

Do banks price the risks of climate policy change? Combining syndicated loan data with carbon intensity data (CO2 emissions relative to revenue) of borrowers across a wide range of industries, we find a significant “carbon premium” since the Paris Agreement. The loan risk premium related to CO2 emission intensity is apparent across industries and broader than that due simply to “stranded assets” in fossil fuel or other carbon-intensive industries. The price of risk, however, appears to be relatively low given the material risks faced by some borrowers. Only carbon emissions directly caused by the firm (scope 1) are priced, and not the overall carbon footprint including indirect emissions. “Green” banks do not appear to price carbon risk differently from other banks.

Suggested Citation

  • Ehlers, Torsten & Packer, Frank & de Greiff, Kathrin, 2022. "The pricing of carbon risk in syndicated loans: Which risks are priced and why?," Journal of Banking & Finance, Elsevier, vol. 136(C).
    • Handle: RePEc:eee:jbfina:v:136:y:2022:i:c:s0378426621001394
    DOI: 10.1016/j.jbankfin.2021.106180
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    More about this item

    Keywords

    Environmental policy; Climate policy risk; Transition risk; Loan pricing;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • Q01 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General - - - Sustainable Development
    • Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics

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