Climate risk and bank loan contracting

Abstract

We construct an event-based measure of climate risk based on firm-level environmental, social, and governance (ESG) incidents related to climate using data from RepRisk and investigate whether a borrower's adverse climate incidents affect bank loan contracting. Using a sample of 620 publicly traded US firms over the period 2007-2016, we are the first study to document that loans initiated after the occurrence of firms' first adverse climate-related incidents have significantly higher spreads, shorter maturities, more covenant restrictions, and higher likelihood of being secured with collateral. In cross-sectional tests, we find that intensity and influence of the adverse climate related incidents have a larger impact on the pricing of bank loans. Our results support the notion that banks incorporate firm-specific climate risks into their lending contracts.