ECB study finds polluting companies get worse borrowing terms from banks

Analysis of more than 5,000 firms shows a relationship between emissions, ecotoxicity and higher collateral requirements

The European Central Bank (ECB) has found companies with polluting assets have a harder time accessing capital.

In partnership with academics, the bank published research this week exploring the relationship between carbon emissions, ecotoxicity and borrowing patterns at more than 5,000 European firms.

The study concluded that entities with more polluting assets generally have a lower loan-to-value (LTV) ratio, meaning banks offer them smaller loans for the same collateral.

“Our results indicate that banks are more cautious in their lending when pollution occurs closer to protected areas, as evidenced by lower LTV ratios, particularly at distances below 2km from protected areas,” explained Theodor Cojoianu, an associate professor of sustainable finance at Singapore Management University, and one of the researchers on the paper.

The trend was even more pronounced among banks that are signed up to the Equator Principles, a global framework used to address environmental and social risks in project finance.

In those cases, firms operating within 1km of protected natural sites saw a 1% reduction in LTV ratio for every one unit increase in ecotoxicity – meaning a 21% lower LTV ratio for the highest polluters compared with the lowest.

According to the findings, the correlation was strongest in new loans, suggesting that the trend is picking up steam.

You can read the climate-biodiversity-pollution nexus: the pricing of environmental credit risks for European industrial polluters here.