Loan pricing and biodiversity exposure: Nature-related spillovers to the financial sector

Biodiversity loss can have direct economic impacts, as it limits the availability of natural resources and increases costs across various industries. Biodiversity and nature-related risks can jeopardize creditworthiness of borrowers, and raises concerns for lenders, potentially leading to stricter lending conditions. This paper analyzes how these risks spread from the real economy to the syndicated loan market in the European Union and United Kingdom. We construct a country-level indicator of biodiversity exposure for EU lenders. Our findings show that the exposure of EU banks to biodiversity varies across countries, depending on the exposure level of borrowers and the loan volumes. Secondly, using data on syndicated loans from 2017 to 2022, we observe a positive and significant correlation between loan pricing and the level of biodiversity exposure of the borrower. These findings suggest that creditors are increasingly incorporating nature-related information into their financing decisions, allowing them to diversify and pool risks. • Borrowers can transmit nature-related financial risks to their lenders. • Many European banks extend credit to medium to highly biodiversity exposed debtors. • Creditors factor biodiversity exposure of borrowers into loan pricing. • Lender risk assessment draws from impact materiality in the real economy. • Lending strategies may adjust in reaction to spillovers of location-specific risks.