Will coastal cities like Boston, Miami, and New Orleans suffer substantial damage due to sea level rise one day soon?
While politicians debate the veracity of global warming projections, researchers at the University of Iowa Tippie College of Business are taking a different approach: they are studying the market.
A new paper by Associate Professor of Finance and Henry B. Tippie Research Fellow Wei Li and co-authored by colleagues at the University of Buffalo and the University of Connecticut found that banks are charging higher rates
on corporate loans with terms that exceed five years in U.S. coastal counties with significant projected risk due to sea level rise.
Of note, the study found that while not every bank responded to the risk this way, the most knowledgeable lenders did.
“Banks with a good deal of experience lending in these areas are more likely to price sea level rise risk,” Li said. “Less experienced lenders are less likely to pay attention to this particular risk.”
The study further found that the rise risk effect on loan pricing is strengthened following a period of increased media coverage of climate change. But the effect fades away by the second or third quarter following the spike in news coverage. These temporary increases in the banks' response to the risk and the quick fade away suggest that when facing unconventional risks even sophisticated investors are subject to a limited attention span.
In late 2019 and early 2020 there was an uptick in media coverage of climate change.
For example, new data published in Dec. 2019 from the Ice Sheet Mass Balance Inter-comparison Exercise (IMBIE) generated a considerable amount of coverage by major news organizations such as the BBC and The Washington Post. The consortium of 89 polar experts found that ocean ice melt is already at the top of original projections—putting sea level rise on a worse-case scenario track.
In the meantime, the study found that coastal-based borrowers respond to the less favorable long-term loans by shifting to shorter-term debt.
The working paper titled “Can firms run away from climate-change risk? Evidence from the pricing of bank loans” can be found online at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3477450.
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