The Interrelationship of Credit and Climate Risks

Henry Penikas

No wps100, Bank of Russia Working Paper Series from Bank of Russia

Abstract: The focus of our study is the environmental (E) risk score. For this paper, we have collected a unique database of public ESG ratings for the world largest companies in the Fortune Global 2000 list. The credit risk estimates are derived from publicly available credit ratings. The probability of default (PD) levels result from the use of historical default data. We control for the specifics of industries and sectors. The availability of E-risk data for half of the sample implies the need to apply the Heckman selection model. We show cases when the climate-credit risk relationship is robustly positive for a particular industry and region: in such cases, loan subsidies are indeed advisable to finance large green projects and green corporations (e.g. the 2021 Bank of Japan program Ð though it was tailored for SMEs). Otherwise Ð in the predominant number of cases Ð such a loan rate reduction may foster the accumulation of credit risks and pose a threat to financial stability. We contribute to the literature by showing that the revealed positive climate-credit risks dependence is not ubiquitous Ð which is argued by (Capasso, Gianfrate, & Spinelli, 2020).

Keywords: green company; brown company; Sustainalytics; carbon dioxide emissions; Heckman. (search for similar items in EconPapers)
JEL-codes: C24 E52 H23 O44 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2022-09
New Economics Papers: this item is included in nep-cfn, nep-env and nep-rmg
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