Corporate Net Zero Transition and Financing Cost: Evidence of Impact from Global Energy and Utilities Sectors

Driven by growing investor pressure and climate regulations, many firms have disclosed net zero transition plans. However, questions remain about how providers of finance incorporate these disclosures into their decisions. In a recent paper, we investigate the impact of net zero transition (NZT) disclosures on the cost of debt in the energy and utilities sectors globally. We aim to address how these disclosures affect loan financing—in particular, via the cost of debt—in the utilities and energy sectors and also examine which specific aspects of these disclosures are relevant to financing decisions.

We conduct our investigation using a global sample of 40,449 loan facilities during 2002-2022, with borrowers located in 47 countries. We run an empirical analysis of how key NZT disclosure aspects impact loan spreads while controlling for firm and loan-level characteristics. Our NZT score measures cover disclosures on four key NZT aspects: Targets and Panning, Financial Actions, Policy Implementation, and Governance.

Our empirical analysis, including causality checks, reveals that firms with higher NZT scores benefit from lower loan spreads and, therefore, lower cost of debt, indicating that lenders view such firms more favourably due to their commitment to reducing carbon emissions. Our key findings include the following.

1. Better NZT disclosures result in lower loan spreads

Our results indicate a statistically significant relationship between overall NZT disclosures and reduction in loan spreads. In our global sample, a one-standard-deviation increase in the NZT score reduces the cost of a bank loan by 2.82 basis points (bps), which is a 2% decrease relative to the sample mean of 148.89 bps. The size of the effect is more pronounced in Europe, as we discuss below.

This finding suggests that banks favour firms with more comprehensive NZT disclosures, viewing them as lower risk and more creditworthy. This implies that companies could enhance their NZT disclosures to secure more favourable loan terms, potentially reducing overall financing costs. Moreover, the findings support the implementation of regulations on comprehensive net zero disclosures, which could lower the cost of capital for compliant firms and foster a faster low-carbon transition.

2. The impact of NZT disclosures is mostly observed in Europe

We observe that the impact of NZT disclosure is variable across jurisdictions. The NZT score has a strong and significant impact in Europe, with a one-standard-deviation increase in the NZT score leading to a 20.7bps reduction in loan spreads. The size of effect is significant higher—over 7 times—than what we observe on the global sample.

We also observe a significant reduction in loan spreads in Europe associated with improved NZT disclosures after 2008. The impact was even more pronounced following the Paris Agreement in 2015, with a 72.4bps reduction in loan spreads per standard deviation increase in the NZT score, 3.5 times of what we observed for 2002-2022.

On the other hand, the reduction in loan spreads is only marginally statistically significant in North America, reflecting the emerging recognition of NZT disclosure in loan pricing there. Furthermore, the relationship is not statistically significant in emerging markets, implying that NZT disclosure is not yet reflected in loan pricing in these regions.

These regional and time variations of the NZT disclosure impacts could be explained by the differences in environmental policy and regulation across regions. For example, previous research by us and others shows that climate higher levels of climate policy stringency can reduce loan financing costs in the energy and utilities sectors.

3. NZT disclosure components have a variable impact on loan pricing

Under the Target and Planning category, disclosures on total emission and emission intensity reduction alignment with the Paris Agreement contribute to lower loan costs. The reduction in loan spreads for one-standard-deviation increase for each of these disclosures is 1.7bps and 1.4bps, respectively. While these effects are moderate, the results imply that these NZT disclosure elements are all relevant components that are priced by banks.

Under the Financial Actions category, disclosure on environmental R&D expenditure is negatively related to the cost of loans. A one-standard-deviation increase in disclosure on R&D expenditure is associated with a 1bps drop in loan spreads, highlighting the importance of technological innovation in reducing climate risks. This result implies that investors agree that technological innovation is the key factor in addressing climate change.  However, we do not find such a significant impact of disclosure on broader environmental investment indicators.

Under the Policy Implementation category, firms with improved disclosures on energy efficiency policies benefit from the reduction in loan spreads. A one-standard-deviation increase in disclosure on energy efficiency policy is associated with a 2.5bps drop in loan spreads. This finding supports that energy efficiency can play a significant role in combating climate change.  However, we do not find an impact of disclosure on environmental supply chain policies.

Under the Governance category, disclosures on environmental management training and ESG-linked executive compensation, reduce loan spreads. The reductions in loan spreads for one standard deviation increase for each of these disclosures are 3.6bps and 1.8bps, respectively. A particularly interesting finding is that disclosure on management training disclosure has the highest impact. The results indicate that disclosure of governance elements to facilitate net zero transition reduces climate change risks and is integrated into the pricing of loans.

In conclusion, the study provides robust evidence that firms' progress in net zero transition disclosures is increasingly factored into the cost of debt, particularly in Europe post-2008.

We find that lenders are incorporating NZT disclosures into their risk assessments, resulting in more favourable loan terms for firms with strong commitments to reducing carbon emissions. The findings underscore the growing financial benefits for companies to align with global climate goals.

Future research may investigate how NZT plan disclosures and credibility impact pricing in other asset classes (eg equity). Future research may also investigate whether legislation of NZT plans affects corporate NZT performance—disclosure as well as credibility—and asset allocation towards low carbon activities.

The authors’ complete article can be found here.

Xiaoyan Zhou leads the Sustainable Finance Performance theme at the Oxford Sustainable Finance Group.

Rachel Williams is a Senior Strategy Associate at JPMorgan and Part-time PhD candidate at the University of Oxford within the Oxford Sustainable Finance Group focused on transition finance.

Gireesh Shrimali is the Head of Transition Finance Research at the Oxford Sustainable Finance Group and the Technical Lead in the Secretariat for the UK Transition Plan Taskforce, established by HM Treasury in 2022.