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

Do banks price the risks of climate policy change? Combining syndicated loan data with carbon intensity data (CO2 emissions relative to revenue) of borrowers across a wide range of industries, we find a significant "carbon premium " since the Paris Agreement. The loan risk premium related to CO2 emission intensity is apparent across industries and broader than that due simply to "stranded assets " in fossil fuel or other carbon-intensive industries. The price of risk, however, appears to be relatively low given the material risks faced by some borrowers. Only carbon emissions directly caused by the firm (scope 1) are priced, and not the overall carbon footprint including indirect emissions. "Green " banks do not appear to price carbon risk differently from other banks. (C) 2021 Elsevier B.V. All rights reserved.