Nature-Related Risks in Syndicated Lending

This paper examines whether and how banks price nature-related risks in the U.S. syndicated loan market. Motivated by large global declines in natural capital and a substantial biodiversity financing gap, we link loan pricing information from Thomson/Refinitiv LoanConnector to firm-level measures of nature dependency and impacts from S&P Sustainable1 for U.S. firms. Our baseline results show a positive association between a firm's material dependency on natural and loan spreads in the syndicated loan market. A 1% increase in material dependency corresponds to a 0.32% increase in spreads, implying a roughly 0.61 basis points increase from the sample mean. Results are robust to lender × industry × time fixed effects and standard loan controls.

The study exploits the August 2019 relaxation of the U.S. Endangered Species Act in order to identify a mechanism of transition risk relared to nature-dependency of firms. Using a difference-in-differences framework, we find that loan spreads for firms exposed to protected or key biodiversity areas declined in the four quarters after the amendment; a 1% higher material dependency score is associated with a 0.25–0.30% decrease in spreads post-reform. Pre-trend tests and additional controls for climate exposure and ESG ratings support the interpretation that lenders adjusted pricing in response to the policy change. We interpret this as banks pricing the transition risk related to nature-dependency. 

Additional analyses confirm the stability of nature-dependency measures, show similar findings using an alternative measure. Banks also adjust non-price contract terms—reducing maturities and increasing collateral for more nature-dependent firms—and seem to price potential refinancing risk for firms with heavy short-term debt. The paper contributes to literature on biodiversity risks in financial markets and on environmental risk pricing in banking by providing evidence that lenders consider natural-capital dependency in lending decisions. These findings inform directing finance to sustainable projects and help regulators better account for nature-related risks in credit markets.