Pricing climate transition risk: Evidence from European corporate CDS

Katia Vozian and Michele Costola

No 387, SAFE Working Paper Series from Leibniz Institute for Financial Research SAFE

Abstract: The European low-carbon transition began in the last few decades and is accelerating to achieve net-zero emissions by 2050. This paper examines how climate-related transition indicators of a large European corporate firm relate to its CDS-implied credit risk across various time horizons. Findings show that firms with higher GHG emissions have higher CDS spreads at all tenors, including the 30-year horizon, particularly after the 2015 Paris Agreement, and in prominent industries such as Electricity, Gas, and Mining. Results suggest that the European CDS market is currently pricing, to some extent, albeit small, the exposure to transition risk for a firm across different time horizons. However, it fails to account for a company's efforts to manage transition risks and its exposure to the EU Emissions Trading Scheme. CDS market participants seem to find challenging to risk-differentiate ETS-participating firms from other firms.

Keywords: climate change; transition risk; credit risk; credit default swap; emissionstrading system (ETS); financial markets (search for similar items in EconPapers)
JEL-codes: D53 E58 G1 G32 Q51 (search for similar items in EconPapers)
Date: 2023
New Economics Papers: this item is included in nep-eec, nep-ene, nep-env and nep-fmk
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:safewp:387

DOI: 10.2139/ssrn.4463630

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