Effects of Climate Change and Technological Capex on Credit Risk Cycles in the European Union

Nawazish Mirza, Muhammad Umar, Alexandra Horobet and Sabri Boubaker ()
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Nawazish Mirza: Excelia Group | La Rochelle Business School
Muhammad Umar: ECJU - East China Jiaotong University
Sabri Boubaker: Métis Lab EM Normandie - EM Normandie - École de Management de Normandie = EM Normandie Business School

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Abstract: Environmental degradation impacts businesses via both transitional and physical risks. Consequently, this can affect the repayment capacity and the default risk profile of the firms. Another factor that may impair the credit quality is the lack of technological adoption in the prevailing VUCA environment. Using a comprehensive sample of firms from the European Union, we assess the interplay of climate change, technology-related capex, and credit risk. Our findings reveal a positive relationship between emissions and the probability of default indicating a degrading impact of climate change. Similarly, we observe that firms with better environmental scores tend to have lower chances of default. Finally, we report a negative association between tech capex and default risk implying that firms that invest in technology have superior credit resilience. The results remain robust for multiple specifications of the default likelihood. We suggest that policymakers and businesses within the EU should strategically address the nexus of climate change and technology to endure more sustainable business models and financial stability within this dynamic region.

Date: 2024
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Published in Technological Forecasting and Social Change, 2024, 204, ⟨10.1016/j.techfore.2024.123448⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-04894964

DOI: 10.1016/j.techfore.2024.123448

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