The EU Taxonomy and the Syndicated Loan Market

Abstract

We provide first empirical evidence on the financial market effects of the EU Taxonomy for Sustainable Activities. Using international data from the syndicated loan market, we demonstrate that – in the past – firms with larger Taxonomy-aligned revenue shares paid lower interest rates. Business revenue is Taxonomy-aligned if it originates from “transitional activities” that substantially contribute to climate change mitigation. A one-standard-deviation increase in firm revenue from transitional activities is associated with six basis points lower loan spreads. Effects are more pronounced for firms in countries with greater climate risk exposure and more stringent environmental policies, and when lending institutions have green preferences. Our results indicate that financial markets already price in some of the intended effects of the EU Taxonomy.

Keywords: EU Taxonomy; Climate resilience; Syndicated loan spreads; Climate risk

JEL Classification: F34; G12; G32; M14; Q54