Carbon Disclosure, Emission Levels, and the Cost of Debt

Abstract

Do banks charge an environmental premium when lending to publicly listed firms? Using CDP’s unique and comprehensive database on carbon emissions, we study whether firms which choose to voluntarily disclose their carbon emissions enjoy more favorable lending conditions than their non-disclosing counterparts. Our empirical results reveal a significant and negative relation between voluntarily disclosure and loan spreads for informationally opaque borrowers. Furthermore, higher carbon emissions have a positive and significant effect on loan spreads. This effect exists for loans arranged by norms-constrained as well as -unconstrained lenders suggesting that spread premia are driven by environmental risks rather than investor preferences.

Keywords: Carbon disclosure, carbon emissions, cost of debt, loan spreads

JEL Classification: A13, G21, Q51