Corporate carbon risk and loan costs

Against the backdrop of increasingly severe climate change, carbon risk – defined as the uncertainty arising from substantial compliance costs linked to tightening environmental regulations – has become more salient. This study empirically investigates the effects and mechanisms of corporate carbon risk on loan costs, utilizing data from firms listed on the Shanghai and Shenzhen stock exchanges from 2009 to 2021. Our analysis suggests a significant positive relationship between corporate carbon risk and loan costs, indicating that banks impose higher financing costs on companies with greater carbon risk. The mechanism analysis shows that carbon risk increases operational risks, exacerbates liquidity constraints, and reduces profitability, raising firm loan costs. The impact is notably stronger in areas with stringent environmental regulations and industries with lower pollution levels. However, this impact is not meaningful when comparing green and traditional banks. Further analysis reveals that the elevated loan costs imposed on high-carbon-risk enterprises are a consequence of mandates from the central government, rather than the result of independent decision-making by the banks themselves. Given China's ongoing low-carbon transition, policymakers should recognize the adverse consequences of corporate carbon risk on credit markets, as addressing these risks has the potential to accelerate the advancement of sustainable development.