The syndicated loan market, essential for financing capital-intensive industries, faces increasing challenges from climate transition risks linked to global climate goals like the Paris Agreement. These risks, including regulatory, reputational, and market pressures, threaten the creditworthiness of high-emission borrowers and the stability of financial institutions. Green and sustainability-linked loans have emerged as financial innovations to address these risks. Green loans fund environmentally beneficial projects, while sustainability-linked loans tie loan terms to borrowers’ ESG performance, incentivizing sustainable practices. While these tools align financing with climate goals and reduce risk exposure, issues like greenwashing and the lack of standardized ESG criteria remain significant obstacles. This research examines the effectiveness of green and sustainability-linked loans in reducing banks' exposure to climate transition risks within the syndicated loan market. It analyzes loan data, ESG ratings, and CO₂ emissions to assess whether these financial products achieve their environmental goals. The study focuses on how global systemically important banks (GSIBs) are reducing exposure to high-emission ("brown") industries and develops a new classification framework using cluster analysis to better capture climate risks.
Climate Transition Risk in the Syndicated Loan Market
Gennaro de Novellis
;Alberto Burchi
2025
Abstract
The syndicated loan market, essential for financing capital-intensive industries, faces increasing challenges from climate transition risks linked to global climate goals like the Paris Agreement. These risks, including regulatory, reputational, and market pressures, threaten the creditworthiness of high-emission borrowers and the stability of financial institutions. Green and sustainability-linked loans have emerged as financial innovations to address these risks. Green loans fund environmentally beneficial projects, while sustainability-linked loans tie loan terms to borrowers’ ESG performance, incentivizing sustainable practices. While these tools align financing with climate goals and reduce risk exposure, issues like greenwashing and the lack of standardized ESG criteria remain significant obstacles. This research examines the effectiveness of green and sustainability-linked loans in reducing banks' exposure to climate transition risks within the syndicated loan market. It analyzes loan data, ESG ratings, and CO₂ emissions to assess whether these financial products achieve their environmental goals. The study focuses on how global systemically important banks (GSIBs) are reducing exposure to high-emission ("brown") industries and develops a new classification framework using cluster analysis to better capture climate risks.
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