Lower margins are tied to companies’ climate performance rather than to low-carbon assets

TL;DR

Banks reward companies with good climate performance but do not adjust loan terms based on the carbon intensity of individual ships, suggesting a need for stronger policies to align finance with climate goals.

Contribution

The study reveals that banks incorporate corporate climate performance into lending but not asset-level carbon intensity, highlighting limitations of current disclosure initiatives.

Findings

Banks reward borrowers with high climate scores but do not differentiate loan terms based on a ship’s carbon intensity.

Signatories of the Poseidon Principles do not adjust loan pricing based on asset-level carbon intensity despite long loan maturities.

Disclosure initiatives like the Poseidon Principles have limited impact on influencing investment decisions aligned with climate goals.

Abstract

Lenders are likely to face significant financial risks from the shift to a low-carbon economy, but it remains unclear whether such risks are incorporated into their lending practices. The extent of this risk depends on whether banks incorporate such risks into their lending activity and whether financial instruments’ tenors are long enough to cover the period when such risks materialize. Using a case study of shipping loans, we combine quantitative data and semi-structured interviews with key shipping debt providers. Our results show that banks, in particular signatories of the Poseidon Principles, a voluntary disclosure initiative in shipping, have started to price in the climate score of shipowners they lend to after the Paris Agreement but on a corporate rather than an asset basis. However, signatories do not differentiate their margins based on a ship’s carbon intensity, despite a relatively long loan maturity, reinforcing the limitations of disclosure initiatives to influence investment outlays.

•After 2015, banks started rewarding borrowers’ climate performance•Poseidon Principles signatories now reward borrowers’ climate performance•Ships’ carbon intensity does not impact their loans’ pricing•Financial policy and action are needed to align shipping finance with climate goals

After 2015, banks started rewarding borrowers’ climate performance

Poseidon Principles signatories now reward borrowers’ climate performance

Ships’ carbon intensity does not impact their loans’ pricing

Financial policy and action are needed to align shipping finance with climate goals

This study explores how the climate performance of a borrower and of an asset financed affects the cost of debt by using a case study of shipping loans. The study highlights that although some banks reward companies with high climate scores, they do not distinguish loan terms based on individual ships’ carbon intensity. Furthermore, despite initiatives like the Poseidon Principles, by which lenders disclose the carbon intensity of their shipping portfolio, the expected reduction in financing costs for greener ships has not been observed. The findings suggest that strengthening disclosure initiatives and implementing regulatory measures could better align the financial sector with climate goals. Public financial bodies can also play a crucial role by providing direct support for cleaner assets. By addressing these issues, the study offers pathways to enhance the financial sector’s role in achieving decarbonization, ultimately contributing to global efforts to mitigate climate change.

Fricaudet et al. show that banks reward borrowers with high climate scores but do not adjust loans based on assets’ carbon intensity, using shipping as a case study. Even voluntary emission disclosers are not adjusting. This suggests that enhanced disclosure and financial regulation are needed to better align shipping finance with climate goals.

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