Can Firms Run Away from Climate-Change Risk? Evidence from the Pricing of Bank Loans

Abstract

We examine whether climate-change risk affects firms’ cost of capital when firms can adapt to the risk. We show that firms’ cost of long-term loans increases with the sea level rise (SLR) risk. This effect is stronger when it is harder for firms to relocate or otherwise diversify SLR risk. Moreover, the spread-risk sensitivity is higher if the lead bank has more experience with the risk and in times of heightened media attention. This suggests banks have limited attention to this unconventional risk. Finally, affected firms respond to the pricing of the risk by using less long-term debt.

Keywords: Bank loans, Climate change risk, Sea level rise, Syndicated loans

JEL Classification: G14; G21; Q54