Do Costs of Corporate Loans Rise With Sea Level?

Abstract

We examine whether climate-change risk affects firms’ cost of capital when firms can adapt to the risk. We find firms’ cost of long-term loans increases with sea level rise (SLR) risk, but this effect mainly holds among firms with high adjustment costs to the risk, i.e., firms for whom it is hard to relocate or otherwise diversify SLR risk. Moreover, the spread-risk sensitivity is higher if the bank has more experience with the risk and in times of heightened media attention. This suggests banks have limited attention to this unconventional risk.

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

JEL Classification: G14; G21; Q54