Carbon Risk in Loan Pricing: Commitment Channels and Real Effects

We study how carbon risk affects the pricing of U.S. corporate loans and how firms’ and lenders’ commitments influence both loan terms and business decisions. Combining syndicated loan data with firm-level carbon emissions, we document a carbon risk premium: financial institutions charge higher loan risk spreads to borrowers with a higher carbon intensity. This premium varies with the environmental commitments of borrowers and lenders. Borrowers signaling commitments—emission targets, emission disclosures, or green loans—receive discounts that decline with increasing carbon intensity, while committed lenders charge higher interest rates to carbon-intensive borrowers. Beyond affecting the carbon premium, commitments influence real economic outcomes by increasing corporate investment and R&D expenditures, and by reducing precautionary liquidity holdings. We also show that the carbon premium in U.S. loan markets intensifies during periods of monetary tightening in line with the risk-taking channel of monetary policy. Notably, the carbon premium is time varying and has declined in recent years.