Climate transition plans linked to lower corporate borrowing costs

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Climate transition plans and borrowing costs

Highlights

Between 2016 and 2023, listed companies with fully developed climate transition plans faced average annual effective interest rates 0.8 percentage points lower on debt than peers without plans.
The study found the strongest link between transition plans and lower borrowing costs within developed economy financial services and real estate firms, and developing economy healthcare firms.
Research showed no significant effect from transition plan disclosure on company profits or stock market performance, limiting clear financial market rewards for sustainability strategies.

Global study findings on debt pricing

As reported by Financial Times, research commissioned by the International Transition Plan Network finds that, between 2016 and 2023, listed companies with fully developed climate transition plans tend to face lower annual effective interest rates on outstanding debt than companies that do not publish such plans. The study was prepared by SCS Consulting Services, reviewed by experts at Oxford university and based on almost 8,000 companies worldwide, with adjustments for size, sector and region.

Researchers say the gap averages 0.8 percentage points, suggesting investors may treat transition planning as a sign of stronger climate risk management and greater long-term resilience. Transition plans can include net zero targets, assessments of risks and opportunities from the green shift, evidence of policy engagement and measures of CO2 emissions.

Simone Varotto, professor of finance at the University of Reading, says the economic logic is that companies showing investors they are serious about global warming may appear better equipped to operate in a future shaped by tighter climate regulation. The study also identifies the strongest link between transition plans and lower borrowing costs among financial services and real estate companies in developed economies, and among healthcare companies in developing economies.

Regulatory context and market limits

The findings arrive as regulators in the EU and UK continue to develop transition plan frameworks without making disclosure mandatory. The European Central Bank says it plans targeted supervisory exercises on banks' prudential transition planning over the next two years, keeping the issue high on the regulatory agenda.

The study comes amid a broader backlash against environmental, social and governance investing, especially in the U.S., where investors have questioned whether climate-focused strategies improve returns. The research itself finds no significant effect from transition plan disclosure on either profits or stock market performance.

Some analysts caution that the results do not break borrowing costs down by debt type, limiting conclusions about where the pricing benefit appears. Nicola Ranger, a professor focused on sustainable finance at the London School of Economics, says it remains uncertain whether disclosure itself causes lower borrowing costs, because reporting capacity and transparency may also track broader management quality.

Ulf Erlandsson, a senior credit portfolio manager at Swedish national pension fund AP4 and founder of the Anthropocene Fixed Income Institute, says the findings are consistent with his own work on investor preference for bond issuers with lower CO2 emissions. But Ulrich Volz, director of the Centre for Sustainable Finance at Soas University of London, says markets do not yet clearly reward more sustainable corporate strategies in practice, noting that oil company stocks perform strongly this year.

Our earlier article on Mario Draghi’s warning about high interest rates and rising debt burdens explained how keeping rates above growth can worsen public debt dynamics and lift inflation premia, ultimately pushing up borrowing costs. It also highlighted his argument that central banks should prioritise inflation control while avoiding unnecessarily restrictive rate paths that would choke off productive investment and long-term growth.

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