Essays in Climate Finance: Climate Risks in Real Estate and Banking

Graduation Year

2024

Document Type

Dissertation

Degree

Ph.D.

Degree Name

Doctor of Philosophy (Ph.D.)

Degree Granting Department

Finance

Major Professor

Daniel Bradley, Ph.D.

Committee Member

Jared Williams, Ph.D.

Committee Member

Ninon Sutton, Ph.D.

Committee Member

Jung Chul Park, Ph.D.

Committee Member

Erwin Danneels, Ph.D.

Keywords

Bank Performance, Commercial Loans, Commercial Real Estate, Seal Level Rise

Abstract

This dissertation includes two essays that examine the impact of climate risks on commercial real estate and bank performance. In the first essay, I study the impact of sea level rise (SLR) on commercial real estate (CRE) pricing and commercial lending. Using novel property level sale transactions from 2011-2018, I find that commercial properties exposed to a 6-feet sea level rise are sold at a 6% discount, which increases over time. This discount appears to be driven by local buyers and buyers’ brokers that are more sensitive to climate risks. In addition, the discount significantly rises after an extreme hurricane, suggesting that salient risks impact pricing. Likewise, lenders require higher down payments for properties exposed to SLR, and this requirement is amplified following an extreme hurricane. However, the capitalization rate appears to be unaffected by sea level rise. These findings suggest that commercial real estate investors and banks are becoming more cognizant of the risks posed by sea level rise. In the second essay, I create a climate risk index for banks based on the climate exposure of their asset portfolio. Banks highly exposed to climate risk perform worse than those not exposed from an accounting, stock, and bond perspective. Around significant climate events, banks with more climate exposure are associated with lower cumulative abnormal returns in affected and unaffected areas, suggesting salience plays a role. Furthermore, banks with higher climate risk are more likely to fail, merge, or be acquired by those with lower climate risk. Overall, this paper suggests that climate risk is an important factor in pricing banks’ securities.

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