A new study finds that APAC banks charge “brown” businesses a higher lending rate than “non-brown” businesses, by about 23 basis points, since the Paris Agreement.

The Hong Kong Monetary Authority (HKMA) released a research paper describing how APAC banks factor climate transition risks into their lending to emissions-intensive sectors.

On average, banks are estimated to charge high-issuance (“brown”) firms a higher loan spread of 23 basis points, compared to what they charge non-brown firms. “This is economically significant because the transition risk premium equates to a 14% increase in the average loan spread,” the document said.

In principle, ‘brown’ companies would be more exposed to transition risks, suggesting that their future cash flow and debt repayment capacity could be affected in the event of a disorderly transition to a low-carbon economy, indicates the document.

Research also found that brown companies borrowed less than their non-brown counterparts before the Paris Agreement, indicating that banks were underestimating their risk in emissions-intensive sectors at the time.

In addition, research shows that a “green” bank (i.e. members of the UNEP Finance Initiative) would charge an additional loan spread of around 9.2 basis points compared to others. banks for the same “brown” exposure.

“These results together suggest that the green attitude of banks plays a key role in determining the extent of the additional loan premium for transition risk,” the document said.

The full paper is available here.

The analysis focused on data from a sample of syndicated loans in major APAC markets over the period 2010 to March 2021, obtained from the Thomson Reuters LPC DealScan database. Company GHG emissions data are obtained from S&P Trucost.