The Impact of Climate Change on the Cost of Bank Loans

We find that firms in locations with higher exposure to climate risk, as measured by drought conditions, pay significantly higher spreads on their bank loans. Exploiting the economic link between a firm and its customers, we also show that the exposure of a firm’s customers to climate risk increases that firm’s cost of borrowing. Cross-sectional analysis indicates that the effect is driven by the long-term loans of poorly rated firms. Overall, our evidence suggests a slow increase in lenders’ attention to climate risk and that lenders have yet to fully understand and price all dimensions of this risk.