A recent study from the University of Oxford has identified a significant relationship between a company’s net zero transition activities and lower loan spreads, particularly in the energy and utility sectors.
The research shows that a one-standard deviation increase in a company’s net zero transition (NZT) score results in a 2.86 basis points (bps) decrease in the cost of a bank loan, translating to a 2% reduction relative to the sample mean of 148.95 bps.
This trend is especially pronounced in Europe, where a similar increase in NZT scores leads to a substantial 20.7 bps reduction in loan spreads. North America also showed a notable impact, while emerging markets lagged behind in this correlation.
The study further analyzed the connection between lower debt costs and various net zero-related activities, finding that environmental training, ESG-linked compensation, and strong environmental teams had the highest correlation with reduced financing costs.
For sustainability professionals and ESG solutions providers, this research underscores the financial case for investing in net zero initiatives and disclosures.
Companies that view net zero transitions as a mere expense may be overlooking significant financial value, as lower debt costs can lead to millions in interest savings for large borrowers. As the price of carbon rises, the financial impacts of poor net zero planning are expected to extend beyond the energy and utility sectors.
Abstract by Santander
We study whether net zero transition (NZT) affects loan pricing in the energy and utilities sectors of the loan market. We find that firms with higher levels of overall NZT disclosure experience lower cost of debt in the loan market, controlling for loan-specific and firm financial characteristics. This association is much more pronounced in Europe than in North America and other emerging markets. We also identify relevant NZT actions contributing to such a relation. Firms disclosing clear emission reduction targets which align with the Paris Agreement enjoy lower loan spreads. Additionally, environmental R&D expenditure and improved energy efficiency policies are associated with lower loan spreads. Moreover, effective governance actions, such as environmental management training and ESG-linked executive compensation, reduce climate risks and loan spreads.
Download and read the report: Corporate net zero transition and financing cost: Evidence of impact from global energy and utilities sectors
Authors Xiaoyan Zhou, University of Oxford; Rachel Williams, University of Oxford; Gireesh Shrimali, University of Oxford
Date Written: September 10, 2024
