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The pricing of carbon risk in syndicated loans: which risks are priced and why?

Author

Listed:
  • Torsten Ehlers
  • Frank Packer
  • Kathrin de Greiff
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.

Suggested Citation

  • Torsten Ehlers & Frank Packer & Kathrin de Greiff, 2021. "The pricing of carbon risk in syndicated loans: which risks are priced and why?," BIS Working Papers 946, Bank for International Settlements.
    • Handle: RePEc:bis:biswps:946
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    environmental policy; climate policy risk; transition risk; loan pricing;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • Q01 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General - - - Sustainable Development
    • Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics

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