Do firms benefit from carbon risk management? Evidence from the credit default swaps market

Huu Nhan Duong, Petko S. Kalev, Madhu Kalimipalli and Saurabh Trivedi

Journal of Corporate Finance, 2025, vol. 94, issue C

Abstract: This paper contributes to existing climate finance literature by examining how firms' proactive management of carbon risks affects market assessment of their credit risk. Using two quasi-exogenous events involving the 2015 Paris Climate Agreement and the staggered implementation of U.S. state climate adaptation plans, we find that stronger carbon risk management is associated with significantly lower credit default swap spreads. Our results are not driven by firm-level climate exposure, and social or governance risk. Firms with better carbon risk management also exhibit lower subsequent carbon emissions. Our paper highlights the importance of carbon risk management in mitigating credit risk.

Keywords: Carbon risk management; Credit risk; Credit default swap spread; Environmental, social, and governance; The Paris climate agreement; U.S. state climate adaptation plans (search for similar items in EconPapers)
JEL-codes: G00 G01 G10 G15 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:94:y:2025:i:c:s0929119925001117

DOI: 10.1016/j.jcorpfin.2025.102843

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