Being Stranded with Fossil Fuel Reserves? Climate Policy Risk and the Pricing of Bank Loans

Abstract

Do banks price the risk of stranded fossil fuel reserves? To address this question, we hand collect global data on corporate fossil fuel reserves, match it with syndicated loans, and subsequently compare the loan rate charged to fossil fuel firms — along their climate policy exposure — to other firms. We find that before 2015 banks did not price climate policy exposure. After 2015, however, our results show a significantly higher cost of credit for fossil fuel firms exposed to stricter climate policy, particularly along recorded proved reserves over assets. “Green” banks also charge higher loan rates to fossil fuel firms.

Keywords: Environmental policy; Climate policy risk; Loan pricing; Loan maturity; Carbon bubble; Fossil fuel firms; Stranded assets

JEL Classification: G2, Q3, Q5