Companies based in countries with high levels of physical climate risk pay more for loans, according to new research.

A researcher looked at almost 86,000 loans for more than 9,000 companies in 77 countries to investigate what happens to a corporate’s ability to raise a loan in jurisdictions affected by the climate emergency.

The findings conclude that an increase in a company’s exposure to physical climate risk increases its cost of raising debt capital—in some instances by as much as 39 basis points.

An investigation was made of which loans were more prone to higher costs and researchers found that costs increased as loan maturity increased, with longer maturities most affected, as were loans to companies in “financial distress”.

Karol Kempa, director at the Frankfurt School of Finance & Management, writes: “Using a global sample of syndicated loans, we find that banks charge a premium on loans to firms with headquarters and subsidiaries in countries with a high climate change vulnerability.

“This effect is particularly high for loans with long maturities and borrowing in financial distress.”

Unsustainable argument

The findings come at a time when there is a considerable political pushback against the idea of the climate emergency from the right wing in the US and elsewhere.

But the research shows that, despite the politics, significant players in the business sector still see climate and sustainability as a risk factor to be addressed.

A survey published last week showed 97% of business leaders across the S&P 500 and FTSE 100 still consider sustainability to be important, despite widespread concerns that business may be “in retreat” from the issue.

That said, 61% of those polled said they “underinvest” in sustainability, given its strategic importance.

Last year at COP30, the Taskforce on Net Zero Policy issued a report laying out the importance of corporate governance in tackling climate.

The report said: “Corporate governance is emerging as the bridge between companies’ climate commitments and the concrete actions needed to deliver them.”

Climate thinking is finding its way into executive pay and board oversight structures.

Greenhouse gas emissions are an important factor in company reporting. The EU’s Corporate Sustainability Reporting Directive explicitly requires reporting on greenhouse gas emissions.

So too does TCFD, a reporting standard in use by the UK largest companies, and IFRS S1 and S2, standards from the International Sustainability Standards Board that will soon be adopted by Whitehall.

Despite criticism and even denial, climate change remains a critical issue for the planet and, therefore, business. This latest survey shows banks see it as an important risk in their loan businesses.