In August 2025, the European Central Bank published a paper by Andreas Beyer and Lorenzo Nobile entitled: “The impact of climate litigation risk on firms’ cost of bank loans.”
We already know that climate litigation on its own can be very expensive for firms. This new research is of utmost importance to firms as bank loans constitute “a critical – often the primary – source of external finance” and banks are “uniquely positioned to monitor borrowers and accurately assess risk”.
The researchers used a dataset of 5,264 bank loans issued to 329 firms worldwide between 2006 to 2021 (from the Dealogic database) and a dataset of each firm’s involvement in climate related lawsuits (using the Sabin Center for Climate Change Law Database), including the frequency of such legal actions. Researchers have also drawn firm-level corporate governance and ESG profile variables from Refinitiv.
The findings provide strong empirical support that banks do incorporate climate litigation risk considerations into their lending decisions:
- Firms involved in climate lawsuits face, on average, interest rates that are approximately 4% higher than those charged to firms without such legal exposure.
- These firms typically receive smaller loan amounts and shorter loan maturities, suggesting a broader pattern of risk aversion on the side of lenders.
- Companies seeking loans while facing novel climate lawsuits (with new legal arguments or imposing new compliance requirements) are more likely to experience adverse effects and face higher loan spreads.
- Financial penalties are especially pronounced for firms with poor environmental performance or a history of Environmental, Social, and Governance (ESG) controversies.
However, firms that invest in ESG will find encouragement in this research:
- Firms with stronger environmental performance are expected to experience a mitigated decline in loan accessibility, whereas those in heavily polluting industries will face greater restrictions.
- Better corporate governance quality could mitigate information asymmetry problems and therefore lower the cost of debt financing (Ghouma et al., 2018).
The key word from this 53-page paper is “systematically”. Lenders are systematically adjusting contractual structures in response to perceived climate litigation risk. Therefore, this risk is a serious, material consideration for firms worldwide.
What can firms do with these findings?
Back in 2024, in his keynote speech at the Bank’s Legal Conference, Frank Elderson, the Vice-Chair of the European Central Bank said:
“ .. The litigants in these cases are sophisticated and use their transnational networks to build precedents across borders. They are well-funded, well-connected and well-organised.
And they can – and do – hire the best and brightest lawyers in the field. …
To address this source of litigation risk, the best advice I can give is that banks should start putting in place their Paris-aligned transition plans.” [1]
For firms still hesitant to adopt transition plans, this research offers a compelling financial rationale: credit risk and loan pricing.
You can see the full ECB Working Paper No. 3087 here.
Private Goodness 