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 2631, Working Paper Series from European Central Bank

Abstract: This paper explores how the need to transition to a low-carbon economy influences firm credit risk. It develops a novel dataset which augments data on firms’ green-house gas emissions over time with information on climate disclosure practices and forward-looking emission reduction targets, thereby providing a rich picture of firms’ climate-related transition risk alongside their strategies to manage such risks. It then assesses how such climate-related metrics influence two key measures of firms’ credit risk: credit ratings and the market-implied distance-to-default. High emissions tend to be associated with higher credit risk. But disclosing emissions and setting a forward-looking target to cut emissions are both associated with lower credit risk, with the effect of climate commitments tending to be stronger for more ambitious targets. After the Paris agreement, firms most exposed to climate transition risk also saw their ratings deteriorate whereas other comparable firms did not, with the effect larger for European than US firms, probably reflecting differential expectations around climate policy. These results have policy implications for corporate disclosures and strategies around climate change and the treatment of the climate-related transition risk faced by the financial sector. JEL Classification: E58, G11, G32, Q51, Q56, C58

Keywords: climate change; credit risk; disclosure; green finance; net zero; transition risk (search for similar items in EconPapers)
Date: 2021-12
New Economics Papers: this item is included in nep-ene, nep-env and nep-mac
Note: 3546207
References: View complete reference list from CitEc
Citations: View citations in EconPapers (17)

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Related works:
Working Paper: The low-carbon transition, climate commitments and firm credit risk (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20212631

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