Climate Change and Credit Risk

Journal of Cleaner Production, 2020

EDHEC-Risk Institute Working Paper, 2020

39 Pages Posted: 29 May 2020

Date Written: February 2020


We investigate the relationship between exposure to climate change and firm credit risk. We show that the distance-to-default, a widely used market-based measure of corporate default risk, is negatively associated with the amount of a firm’s carbon emissions and carbon intensity. Therefore, companies with high carbon footprint are perceived by the market as more likely to default, ceteris paribus. The carbon footprint decreases the distance-to-default following shocks - such as the Paris Agreement - that reveal policymakers’ intention to implement stricter climate policies. Overall, these results indicate that the exposure to climate risks affects the creditworthiness of loans and bonds issued by corporate. Financial regulators and policymakers should consider carefully the impact of climate change risks on the stability of both lending intermediaries and corporate bond markets.

Keywords: Climate Change, Credit Risk, Carbon Emissions, Climate Risk, Distance to Default

JEL Classification: G18, G32

Suggested Citation

Gianfrate, Gianfranco, Climate Change and Credit Risk (February 2020). Journal of Cleaner Production, 2020, EDHEC-Risk Institute Working Paper, 2020, Available at SSRN:

Gianfranco Gianfrate (Contact Author)

EDHEC Business School ( email )

58 rue du Port
Lille, 59046

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