Climate disclosures cut borrowing costs, finds study

Researchers find ‘statistically significant’ link between climate transparency and financial terms of 40,000 loans

A study of more than 40,000 loans has found that companies disclosing on their climate transition get cheaper debt.  

Xiaoyan Zhou and Gireesh Shrimali, both academics at Oxford University, analysed lending facilities offered by banks to energy and utilities companies from 47 countries between 2002 and 2022.

They evaluated each borrower based on how transparent it was about its climate transition (NZT), with a particular focus on its strategy, targets, financial actions, policies and governance.

Every firm was then awarded a ‘NZT score’, and the researchers looked at how that score affected different companies’ borrowing costs at a single moment, and the borrowing costs of individual companies over an extended period of time.  

“Our results indicate a statistically significant relationship between overall NZT disclosures and reduction in loan spreads,” the study concluded, adding that “firms with higher NZT scores benefit from lower loan spreads and, therefore, lower cost of debt, indicating that lenders view such firms more favourably due to their commitment to reducing carbon emissions”.

Specifically, a one-standard-deviation increase in a company’s disclosure score cut the cost of a bank loan by 2.86bps. This skyrocketed to 20.7bps in Europe, but was limited in North America, and insignificant in emerging markets.  

Different types of climate disclosures were associated with different levels of change.

For example, transparency about management training came with the greatest reduction in loan spreads, at 6.4 bps, along with ESG-linked pay (5.2bps), R&D spending (1bps), energy efficiency policies (2.5bps) and emissions reduction targets (1.4bps).

“However, we do not find such a significant impact of disclosure on broader environmental investment indicators,” the researchers noted, pointing to evidence that reporting on supply chain policies doesn’t have an impact on loan costs.

The analysis found steeper reductions in more recent years, especially since the Paris climate agreement was made official in 2015.

In conclusion, the researchers said, the findings implied “that companies could enhance their NZT disclosures to secure more favourable loan terms, potentially reducing overall financing costs”.