Lower margins are tied to companies’ ESG rating rather than to low-carbon assets

Abstract

Abstract Lenders are likely to face significant transition risk associated with stranded shipping assets, but whether and how such risks are incorporated in their lending practices is still an open question. The extend of this risk depends on whether banks are able to incorporate such risks in their lending activity. Our results show that lower margins are tied to shipowners’ ESG rating rather than to low-carbon ships. Banks penalized carbon efficient ships before the Paris Agreement, but they no longer do while they have started rewarding shipowners with better ESG performance since then. Signing the sectoral voluntary disclosure initiative (Poseidon Principles), leads lenders to request margins 2.4 percentage points lower for companies with high ESG ratings, compared to those with the low scores. However, the Poseidon Principles does not impact the pricing of ships’ carbon intensity, casting doubts on the capacity of disclosure initiatives to change investment outlays.