Transition risks related to climate change are increasingly recognised in equity and bond markets. This column uses syndicated loan tranches issued to US firms to study how carbon risk is priced. It finds robust evidence that firms with higher carbon intensity face higher loan spreads. However, this carbon premium has declined and effectively disappeared in recent years, though it increases during periods of monetary tightening. Borrowers that signal environmental commitment pay lower loan risk spreads and undertake higher capital and R&D expenditure, but the discount shrinks as carbon intensity rises.



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