Abnormal Temperatures, Climate Risk Disclosures and Bank Loan Pricing: International Evidence

Abstract

This paper examines the effect of abnormal-temperature-related climate risk on bank loan pricing. Using a sample of syndicated loans from 35 countries and jurisdictions, we find that banks charge higher interest rates for borrowers with higher climate risk. We also find that climate risk affects loan spreads of both long-term and short-term loans, and this effect is more pronounced for short-term loans. Our cross-sectional analyses reveal that voluntary climate risk disclosures in conference calls by borrowers mitigate the impact of climate risk on loan spreads, especially when lead banks have less climate-risk-related lending experience. In addition, the borrowing cost of high-climate-risk borrowers in the United States decreases after the SEC issued climate risk disclosure guidance. However, the ESG disclosure requirements in 19 other countries, which are not climate-risk-specific, do not alter the effect of climate risk on bank loan pricing.