Climate Risk Pricing, Fair Access, and the Evidence for Ordinary Credit Risk Management
Financial institutions face an increasingly complex regulatory environment. Prudential supervisors in the EU and certain internal risk-management frameworks expect banks to identify climate-related financial risks that may affect credit quality, collateral values, funding costs, liquidity, and portfolio concentrations. At the same time, U.S. federal and state regulators are scrutinizing banks for evidence of so-called "debanking" (or fair access), fair lending, and ESG coordination in connection with climate-related banking decisions. The central issue is not whether climate considerations may ever appear in a banking decision, but whether the decision can be traced to an identifiable financial risk rather than political preference, an unsupported categorical exclusion, or coordinated market conduct.
Empirical Research on Climate Exposure in Bank Funding, Collateral, and Loan Pricing
Recent empirical research demonstrates that climate variables may be relevant to pricing, tenor, collateral, liquidity, and concentration analysis when the connection to financial risk is identified and documented.
The first channel is funding and liquidity. In ECB Working Paper No. 3168, "Climate change, bank liquidity and systemic risk," the authors analyze data from the European Central Bank's Money Market Statistical Reporting dataset, covering Euro-area repo transactions from 2019 to 2022 among the 46 largest reporting banks and 223 borrowing counterparties. The authors find that banks with greater transition-risk exposure—proxied by financed greenhouse gas emissions—faced short-term borrowing rates roughly 7% to 12% higher on average. The paper attributes this premium to both credit-risk effects and dealer preference effects, and finds that it intensifies during periods of financial stress, and that, in half of the policy-rate increases, rates for high-emission banks adjusted approximately 7% faster than those for low-emission banks. For risk managers, the implication is limited but meaningful: transition exposure may affect wholesale funding and liquidity costs.
A second channel is collateral valuation and localized physical risk. "Firm Credit Conditions and Flood Risk: Evidence from Ireland" (The Economic and Social Review, 2025) uses flood maps and geolocated loan data from AnaCredit (the ECB's analytical credit datasets) to compare borrowers with similar characteristics but different flood exposure. The authors report that borrowers in flood-risk areas face steeper costs in accessing credit both in terms of interest rate premium (quantifiable in 7 to 13 basis points) and of collateral requirements (4% to 16% more likely to provide collateral). The authors conclude that Irish lenders are effectively pricing in flood risk, acknowledging that future studies could provide a more precise analysis and exact quantification of the relationship between climate risk, credit access, and financial stability.
A third channel is default probability and loan structure. Karol Kempa's "Physical climate risk and the pricing of bank loans" (Journal of Environmental Economics and Management) examines nearly 86,000 global syndicated loans issued to more than 9,000 firms across 77 countries and finds that higher physical climate vulnerability is associated with higher borrowing costs, particularly for longer-maturity loans and financially distressed borrowers, and that banks also adjust loan size, collateral requirements, and fees. Extending the analysis to firm-level credit ratings, Kempa reports that physical climate risk is associated with lower long-term credit-risk ratings but is not associated with short-term ratings.
A fourth channel is litigation risk. In "Climate litigation as a financial risk: evidence from a global survey of equity investors" (Grantham Research Institute, 2026), authors survey 811 equity investors and analysts and find that most view climate litigation as a material financial risk, with many associating financial materiality with early-stage events such as media coverage or case filing, rather than only with a final judgment. On average, respondents rank litigation risk above physical climate risk in perceived materiality, and the authors identify systematic variation in views by geography, investment mandate, and institutional characteristics.
Taken together, these studies help move the discussion from values to valuation. They do not create a safe harbor for climate-related banking decisions. They do, however, provide evidentiary support for the more precise proposition that some climate-related differentials may reflect prudent and reasonable ordinary credit, liquidity, collateral, litigation, and portfolio-risk management rather than ideological exclusion.
Practical Implications for Global Financial Institutions
Global institutions face an added complication: regulatory regimes are not aligned. In the United States, recent developments reflect heightened concern that reputation risk or ESG terminology may mask discriminatory access to financial services, particularly where decisions affect lawful but politically disfavored activities.
In Europe, by contrast, the European Central Bank ("ECB") continues to treat climate- and nature-related risks as prudential matters. In January 2026, the ECB stated that it had embedded climate and nature-related risks into day-to-day processes across monetary policy, supervision, financial stability, and its own operations. The same climate-risk analysis may therefore be scrutinized as potentially exclusionary in one jurisdiction and potentially required in another.
Climate litigation adds another layer to this jurisdictional divergence. The Council of Europe's "Study on national climate litigation" describes climate litigation as a pan-European phenomenon and identifies growing corporate exposure through corporate framework claims, polluter-pays damages theories, decommissioning-related claims, and failure-to-adapt cases. For global banks, these developments may affect borrower valuation, permitting risk, project viability, insurance assumptions, transition-plan credibility, and expected liabilities. The analysis should, however, remain disciplined: depending on the circumstances, these days litigation risk can be more defensible as a banking input when connected to identifiable financial effects
Conclusion
The recent research examines whether and how climate-related variables—funding exposure, physical hazard, borrower vulnerability, and litigation exposure—are associated with bank funding costs, collateral requirements, loan pricing, credit ratings, and investor assessments of firm value, and reports measurable associations through conventional financial-risk channels. The regulatory materials reviewed reflect divergent U.S. and EU approaches to fair access and the treatment of climate-related risk in supervision, and do not create a safe harbor for climate-related banking decisions. They do, however, help explain why climate-related variables—including litigation exposure—may appropriately appear in credit, liquidity, collateral, and portfolio-risk analysis. Applied carefully, this evidence supports a more precise account of climate-risk management as the pricing of identifiable financial risks rather than the exercise of political or other ideological preferences.
