CO2 disclosure cuts the cost of debt

In Carbon disclosure, emission levels, and the cost of debt, Stefanie Kleimeier from Maastricht University and Michael Viehs from Oxford University examine the effects of voluntary CO2 emissions disclosure, and actual emission levels, on the cost of corporate debt.

The authors found that companies choosing to voluntarily reveal their CO2 emissions paid significantly lower spreads on their bank loans, and that higher actual emissions (adjusted for company size and compared to average emissions of the industry) significantly increased loan spreads when a signatory to the CDP (formerly known as the Carbon Disclosure Project) acted as lead arranger.

A unique story

This research is unique because the authors studied actual CO2 levels rather than indirect measures of environmental performance based on sustainability ratings. It also used a global sample of almost 4,000 organisations in 87 countries, whereas previous studies have focused mainly on the US market.

“By matching the lead arrangers to CDP’s signatories, we were able to identify those loans that were arranged by an environmentally concerned investor. Our dataset provided us with a unique opportunity to directly observe the presence of environmentally concerned investors on the loan and then match it to the environmental performance of a specific borrower.”

The data came from two main sources:

• CDP, a voluntary reporting framework with more than 822 signatories boasting a combined asset base of more than US$95 trillion. CDP uses information disclosure, including CO2 emissions data, to improve the management of environmental risk;
• Dealscan, a Thomson Reuters LPC database containing information about bilateral and syndicated loans signed since 1987 by private and public borrowers worldwide. Published data includes the spreads on corporate loans and the identity of the loan’s lead arrangers.

The authors classified any company that was a signatory to the CDP as “environmentally concerned”. They then looked at the level of disclosure made by those companies to see if there was any correlation with the loan spreads on their corporate debt. They also studied the spread on loans where the lead arrangers themselves were signatories to the CDP, and therefore also classed as “environmentally concerned”.

Saving money

The study found a significant difference in loan spreads between companies that completed the CDP questionnaire and disclosed CO2 emissions and those that refused. Based on an average loan size in the sample of US$449 million, and an average spread of 250 basis points (bps) above Libor, the cost for an average company was US$11.2 million per year. Companies that answered the CDP questionnaire and, therefore, disclosed their CO2 emissions, saved an average of US$1.5 million per year in interest costs.

When looking at the actual level of CO2 emissions, the authors found a significant effect on loan spreads when the loan’s lead arranger was environmentally concerned. Based on the same sample data, a 1% increase in CO2 emissions led to an average increase in interest costs of approximately US$1.3 million per year.

“If CDP signatories are amongst the lead arrangers for loans to high-polluting companies, those companies have to pay significantly higher loan spreads, which can be thought of as being a ‘reputational risk premium’.”

Beyond ethics

These results show that the decision to disclose CO2 emissions data is not just an ethical one – it’s a financial one, with companies that choose transparency making substantial interest savings on their corporate loans. The study also shows the impact environmentally concerned lenders acting as lead arrangers are having on the market, imposing risk premiums and pushing up loan spreads for highpolluting companies.