Adverse Climate Incidents and Bank Loan Contracting
45 Pages Posted: 7 Jan 2021
Date Written: October 30, 2020
We investigate how a borrower’s adverse climate-related incidents affect bank loan contracting. Using a sample of 2,622 publicly traded US firms over the period 2000–2016, we construct event-based measures of corporate climate performances based on firm-level adverse climate incidents such as oil spills, excess carbon emissions and deforestation projects. We show that loans initiated after the occurrence of firms’ first adverse climate-related incidents have significantly higher spreads, shorter maturities, more covenant restrictions, and higher likelihood of being secured with collateral. In cross-sectional tests, we find that the intensity and influence of adverse climate-related incidents exacerbate the pricing of bank loans. Our results support the notion that banks incorporate firm-specific climate performance into their lending contracts.
Keywords: Bank loan pricing; Climate finance; Climate risk; Adverse climate-related incidents; Environmental, social, and governance (ESG) incidents; Cost of capital
JEL Classification: G21, G22, K22, K42, Q54
Suggested Citation: Suggested Citation