The Pricing of Carbon Risk in Syndicated Loans: Which Risks Are Priced and Why?

29 Pages Posted: 3 Jun 2021 Last revised: 4 Apr 2022

See all articles by Torsten Ehlers

Torsten Ehlers

International Monetary Fund (IMF) - Monetary and Capital Markets Department; Bank for International Settlements (BIS)

Frank Packer

Bank for International Settlements (BIS)

Kathrin de Greiff

University Zurich; Swiss Finance Institute

Date Written: June 1, 2021

Abstract

Do banks price the risks of climate policy change? Combining syndicated loan data with carbon intensity data (CO2 emissions relative to revenue) of borrowers across a wide range of industries, we find a significant “carbon premium” since the Paris Agreement. The loan risk premium related to CO2 emission intensity is apparent across industries and broader than that due simply to “stranded assets” in fossil fuel or other carbon-intensive industries. The price of risk, however, appears to be relatively low given the material risks faced by borrowers. Only carbon emissions directly caused by the firm (scope 1) are priced, and not the overall carbon footprint including indirect emissions. “Green” banks do not appear to price carbon risk differently from other banks.

Keywords: environmental policy, climate policy risk, transition risk, loan pricing

JEL Classification: G2, Q01, Q5

Suggested Citation

Ehlers, Torsten and Packer, Frank and de Greiff, Kathrin and de Greiff, Kathrin, The Pricing of Carbon Risk in Syndicated Loans: Which Risks Are Priced and Why? (June 1, 2021). Journal of Banking & Finance, Volume 136, 2022, 106180, https://doi.org/10.1016/j.jbankfin.2021.106180., Available at SSRN: https://ssrn.com/abstract=3857716 or http://dx.doi.org/10.2139/ssrn.3857716

Torsten Ehlers (Contact Author)

International Monetary Fund (IMF) - Monetary and Capital Markets Department ( email )

United States

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

Frank Packer

Bank for International Settlements (BIS) ( email )

CH-4002 Basel, Basel-Stadt
Switzerland
4161 280 8449 (Phone)

Kathrin de Greiff

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

University Zurich ( email )

Schönberggasse 1
Zurich
Switzerland

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