The low-carbon transition, climate commitments and firm credit risk

Sante Carbone, Margherita Giuzio, Sujit Kapadia, Johannes Sebastian Krämer, Ken Nyholm and Katia Vozian

No 442, SAFE Working Paper Series from Leibniz Institute for Financial Research SAFE

Abstract: This paper explores how the low-carbon transition affects firms' credit ratings and market-implied distance-to-default. We develop a novel dataset covering firms' greenhouse gas emissions alongside climate disclosure and forward-looking emission reduction targets. Panel regression analysis indicates that high emissions are associated with higher credit risk, but that this relationship can be mitigated by disclosing emissions and committing to reduce emissions. After the Paris agreement, firms most exposed to transition risk saw their ratings deteriorate relative to their peers, with the effect larger for European than US firms, probably reflecting differential climate policy expectations. A dynamic difference-in-differences approach also shows that European firms who make a climate commitment subsequently experience an improvement in their credit rating relative to comparable firms who do not set a target. These results have policy implications for corporate disclosure and pricing of transition risk.

Keywords: climate change; transition risk; climate disclosure; net zero targets; green finance; credit risk (search for similar items in EconPapers)
JEL-codes: C58 E58 G11 G32 Q51 Q56 (search for similar items in EconPapers)
Date: 2025
New Economics Papers: this item is included in nep-ene
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:safewp:312432

DOI: 10.2139/ssrn.5125405

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