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Major European carbon emitters are starting to pay significantly higher interest rates than greener firms, according to research by the Dutch central bank, as lenders begin demanding a premium from borrowers with significant exposure to climate-related risks.
The findings from De Nederlandsche Bank (DNB) come as separate research from the European Central Bank (ECB) shows that eurozone banks are charging monthly interest rates to firms with no emissions reduction targets which are on average 20 basis points higher than those granted to companies with targets.
Taken together, the research presents clear evidence that Europe’s financial markets are now pricing in climate-related risks, creating major incentives for companies to decarbonise their operations and create clear transition plans.
DNB economists carried out two studies that used companies’ carbon emissions as an indicator of their exposure to transition risks, and compared this data to the bond yield spread.
After correcting for other factors affecting the spread, “since 2020, a clear price difference has emerged between the costs of borrowing for companies with relatively high carbon emissions and those with lower (or no) carbon emissions”, DNB said.
“The difference has since widened to over 40 basis points (0.4%). This is the case for bonds with both short-term and long-term maturities, and it implies that companies with lower emissions can finance their operations at lower costs.”
The ECB working paper, titled Climate Risk, Bank Lending and Monetary Policy, presents similar findings, showing that firms in the top 25% of carbon emitters are being charged interest rates that are on average 14 basis points higher than those in the lowest 25%.
DNB suggested that the introduction of stricter climate policies in Europe in recent years, such as the European Green Deal and the Fit for 55 package, could explain the rising risk premium. “At the same time, it cannot be ruled out that other macroeconomic developments or perhaps the COVID-19 pandemic also influenced the level of the transition risk premium,” it added.
Meanwhile, the DNB researchers also found a correlation between the transition risk premium of European companies – the difference in the average bond yield spread between firms with a high- and low-carbon intensity – and the frequency with which companies secure patents that can be labelled as “green”.
“This difference in financing costs is about a quarter lower when carbon-intensive companies invest more in sustainable innovation than similar companies that do not make such green investments,” DNB said, suggesting that the markets are rewarding firms that are actively investing in decarbonisation efforts.
However, the Dutch central bank also warned that “greater availability of reliable information on climate risks is needed to avoid sudden shocks in risk premiums in financial markets and thus help to alleviate uncertainty”.
“It is therefore more important than ever to continue improving the quality, quantity and comparability of available climate information at company level in combination with consistent and forward-looking climate policies,” it said.
This page was last updated August 19, 2024
Written by
Katy Lee has been a writer for Green Central Banking since early 2024, focused on our Asia coverage. A Paris-based journalist who has written for major international titles for more than a decade, she is the co-host of The Europeans, an award-winning podcast about Europe which often covers environmental issues.
