European Central Bank publishes research finding biodiversity risk is mainly priced through higher syndicated loan spreads

The European Central Bank has published a working paper under its Lamfalussy Fellowship Programme in which the authors examine whether banks incorporate firm-level biodiversity risk into lending decisions. Using syndicated loan data for U.S. borrowers from 2007 to 2023, they find that higher biodiversity risk is associated with significantly higher loan spreads, while the evidence on lower loan volumes is weaker, indicating that banks mainly adjust through pricing rather than by restricting credit supply. The paper notes that the views expressed are those of the authors and do not necessarily reflect the ECB. The study builds a new text-based biodiversity risk indicator from firms’ 10-K disclosures using sentence embeddings, alongside measures for four drivers of biodiversity loss: air pollution, climate change, land use and water pollution. It finds that the pricing of biodiversity risk increases after firms incur environmental violations, and that loan pricing effects are stronger for firms with weaker environmental performance and for sustainability-committed banks. By contrast, the paper finds limited evidence that biodiversity exposure materially changes banks’ participation in loan syndicates or that lenders headquartered in more environmentally vulnerable countries respond differently.