The Rising Tide Lifts Some Interest Rates: Climate Change, Natural Disasters and Loan Pricing

Abstract

We investigate the effect of climate change, through natural disasters, on corporate borrowing costs. We test for this relation by exploiting banks’ loan pricing to unaffected, but at-risk, borrowers after a climate change related disaster. We find that banks charge about 8 basis points higher rates to these indirectly affected borrowers, after controlling for a wide range of alternative explanations. Consistent with time varying attention to climate change, this effect increases to 17 basis points in years after major reports on climate change and is concentrated in the year around disasters. Borrowers with the largest exposure to climate change, and those with the least ability to absorb adverse shocks, suffer the highest increase in rates. Our analysis suggests that the total cost for U.S. borrowers from worsening climate change related natural disasters exceeds $250 million every year.