Bond versus banks financing in the climate transition: The role of stranded asset risk

Abstract

What role does bond versus bank debt play in the climate transition? We document that fossil fuel firms with greater stranded asset risk rely less on bond finance and more on bank credit. While bond investors price stranding risk, banks in the syndicated loan market do not. This differential pricing leads to within-firm substitution from bonds to loans, consistent with a relative contraction in bond market credit supply. We also find that large banks are more likely to lend to risk-exposed firms, raising questions about how climate risk is distributed and whether credit flows align with transition objectives.