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

Ehlers, Torsten; Packer, Frank; Greiff, Kathrin

doi:10.1016/j.jbankfin.2021.106180

Cited by 119 publications

(51 citation statements)

References 16 publications

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“…For example, Hoffmann and Busch [1] consider carbon risk 'any corporate risk related to climate change or the use of fossil fuels'. Ehlers et al [2] define carbon risk as 'the potential financial impact of tightening carbon emissions policies'.Trinks et al [3] refer to carbon risk as regulatory and market risks incurred by highemission firms during the transition from a high-carbon to a low-carbon production system. Nguyen and Phan [4] define carbon risk as a firm's financial vulnerability to the transition away from a fossil fuel-based to a lower-carbon economy.…”

Section: Definition and Scopementioning

confidence: 99%

“…They show that only after the adoption of the Paris Agreement have banks started to price the stranded fossil fuel reserves risk, leading to an increase in the cost of credit for fossil fuel firms. Relatedly, Ehlers et al [2] study whether banks price carbon risk across all sectors to reflect a broader phenomenon beyond a specific sector. They also find a significant carbon premium in the syndicated loan market after the adoption of the Paris Agreement, although it is relatively low, at approximately 3-4 basis points.…”

Section: Carbon Risk and Cost Of Debtmentioning

confidence: 99%

“…The reasons for the differences in conclusions may be the differences between sample firms. Although both Ehlers et al [2] and Kleimeier and Viehs [28] use firmlevel carbon emissions as a proxy of carbon risk, Kleimeier and Viehs [28] cover firms that respond to CDP, and Ehlers et al [2] cover sample firms in the Trucost database, which includes not only firms that disclose their carbon emissions but also firms whose emissions are estimated through an input-output model. In addition, the authors use different methodologies to calculate firms' emissions levels.…”

Section: Carbon Risk and Cost Of Debtmentioning

confidence: 99%

“…In addition, the authors use different methodologies to calculate firms' emissions levels. Kleimeier and Viehs [28] use industryand firm-size-adjusted carbon emissions, and Ehlers et al [2] measure carbon risk as annual carbon emissions over annual revenues. The differences in their results may also be driven by different sample periods.…”

Section: Carbon Risk and Cost Of Debtmentioning

confidence: 99%

See 3 more Smart Citations

Firms and climate change: a review of carbon risk in corporate finance

Wang

Zhang

2022

Carb Neutrality

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This paper provides an overview of financial economics-based research on carbon risk with an emphasis on corporate finance. In the corporate finance literature, carbon risk refers to the impact of society’s transition to a low-carbon economy on firm value due to tightening regulations, changing consumer preferences, reputational damage, etc. We focus on the links between carbon risk and different firm performance factors, such as firm risk, cost of capital, financial performance, firm value, and corporate decisions. Although research on carbon risk is still emerging in the corporate finance field, the amount of literature on this topic has been increasing, especially in the last 2 years. We find that some results are robust, while others are mixed. This indicates that conflicting hypotheses still exist, leading to a need for more in-depth exploration.

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Section: Definition and Scopementioning

confidence: 99%

Section: Carbon Risk and Cost Of Debtmentioning

confidence: 99%

Section: Carbon Risk and Cost Of Debtmentioning

confidence: 99%

Section: Carbon Risk and Cost Of Debtmentioning

confidence: 99%

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Firms and climate change: a review of carbon risk in corporate finance

Wang

Zhang

2022

Carb Neutrality

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“…The question of whether financial markets price climate change risk has become of rising interest to practitioners. The focus thus far has been predominantly on stock prices (e.g., Daniel, Litterman and Wagner 2017, Kumar, Xin and Zhang 2019, Hong, Liu and Xu 2019, IMF 2020, Ehlers, Packer and de Greiff 2021, Bolton and Kacperczyk 2021, Faccini, Matin and Skiadopoulos 2022. The overwhelming evidence is that judged by risk premia, share price valuations, and price-earnings ratios, financial markets do not price in climate risks.…”

Section: Introductionmentioning

confidence: 99%

Do Financial Markets Price Risks to Climate Change?

Das

2022

rfm

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Financial markets represent a powerful means to incentivize governments and corporates to take action against climate change. When climatic risks are reflected in the valuation of financial instruments, firms and governments acting in their own self-interest will reorient decisions toward climate-friendly activities. While the literature has found scant evidence that climate change risks are priced into equity share prices, recent work suggests that climate risks are priced into sovereign bonds. I re-examine the link between climate change and sovereign bonds and find that, as with share prices, sovereign bonds do not price in a climate risk premium. This paper thus resolves the anomalous finding that investors would demand a climate risk premium from sovereign bonds but not stocks. I find that, by virtue of their construction, measures of climate change vulnerability and resilience are highly rigid over time, and thus empirically capture country-specific risk premia rather than a climate-specific risk premium.

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Addressing the climate–finance interaction in a new light: From green to brown assets disclosure in the banking industry

Relano,

Paulet,

Mavoori

2024

Strategic Change

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This paper explores the contribution of the banking industry to the decarbonization of the economy in the aftermath of the Paris Agreement. To this end, two complementary indicators are proposed: a carbon balance and a fossil fuel to equity ratio. The main novelty of these indicators is that, beyond traditional approaches in green finance, they take into account the parallel endeavor of banks in fossil fuel financing (so‐called “brown assets”). The results of the inquiry are presented in various maps and graphs. Both elements show that the bank‐induced process of decarbonization is lagging behind that of other industries, which creates a significant risk of financial instability. Changing this banking behavior necessarily involves a climate‐driven reform of the prudential rules on capital requirements; however, given the magnitude of the problem, this might not be enough. Nor is it the most urgent concern. Above all, what this paper makes clear is that the appropriate measurement and disclosure of financed emissions (both “green” and “brown”) is the first crucial step for the correct assessment of climate‐related risk and forms the basis for subsequent policy action.

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

Cited by 119 publications

References 16 publications

Firms and climate change: a review of carbon risk in corporate finance

Firms and climate change: a review of carbon risk in corporate finance

Do Financial Markets Price Risks to Climate Change?

Addressing the climate–finance interaction in a new light: From green to brown assets disclosure in the banking industry

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