The impact of climate change on the cost of bank loans

By Abdullah Al Masum, S. Javadi. Journal of Corporate Finance, 2020

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We find that firms in locations with higher exposure to climate risk, as measured by drought conditions, pay significantly higher spreads on their bank loans. Exploiting the economic link between a firm and its customers, we also show that the exposure of a firm’s customers to climate risk increases that firm’s cost of borrowing. Cross-sectional analysis indicates that the effect is driven by the long-term loans of poorly rated firms. Overall, our evidence suggests a slow increase in lenders’ attention to climate risk and that lenders have yet to fully understand and price all dimensions of this risk.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/49a8bf5ce1d3f82b960ac983c6763eb02579172a