Taking Advantage of Media Attention to Climate Change: CLOs' Trading of Brown Loans

Abstract

We show in this paper that Collateralized Loan Obligations (CLOs) - the main investors in leveraged loans - take advantage of heightened media attention to climate change. As starting point of our analysis, we document loans of firms in carbon-intensive industries trade at a discount during times of elevated attention to climate change. CLOs take advantage of these price discounts by tilting their portfolios toward carbon-intensive industries. Commitments to consider environmental factors by signing the principles of responsible investing (PRI) do not affect this portfolio tilting. Hence, CLOs are one investor class who purchases from investors who divest from brown industries.

Keywords: climate change, sustainable investing, private markets, leveraged loans, institutional investors, shadow banks, non-banks, CLOs, Paris Agreement

JEL Classification: G11, G14, G23, Q51