Circular Economy and Default Risk

Published in the Journal of Financial Management Markets and Institutions, 10/1, 2022

24 Pages Posted: 8 Dec 2021 Last revised: 29 Jul 2022

See all articles by Claudio Zara

Claudio Zara

Bocconi University - Department of Finance; GREEN Research Centre - Bocconi University

Shyaam Ramkumar

University of Milan

Date Written: October 11, 2021

Abstract

By decoupling economic growth from the exploitation of virgin raw materials and environmental degradation, as well as by developing practices more resilient to the economic cycle, Circular Economy (CE) offers effective hedging of linear risks and shields from that of stranded values. We tested this hypothesis focusing on default risk of a sample of 222 European circular issuers focused on manufacturing, construction, energy and oil & gas industries. The time period considered is 2013-2018. The main explanatory variable is the Circularity Score, a brand-new indicator based on material variables pertinent to CE. Default risk is measured on PD values, corresponding to external rating classes, provided by Bloomberg. We found that issuers with a higher level of circularity confirm hypothesis at both short and long term. Moreover, the contribution offered by circularity on de-risking is more relevant in the long term, ranking as 3rd in relation to 4th in the short-term model.

Keywords: credit risk; de-risking effect; circular finance; sustainable finance; circular metrics

JEL Classification: G32, G21, G10, G39

Suggested Citation

Zara, Claudio and Ramkumar, Shyaam, Circular Economy and Default Risk (October 11, 2021). Published in the Journal of Financial Management Markets and Institutions, 10/1, 2022 , Available at SSRN: https://ssrn.com/abstract=3940109 or http://dx.doi.org/10.2139/ssrn.3940109

Claudio Zara (Contact Author)

Bocconi University - Department of Finance ( email )

Via Roentgen 1
Milano, MI 20136
Italy

GREEN Research Centre - Bocconi University ( email )

via Roetgen 1
Milano, Milano 20136
Italy

HOME PAGE: http://https://www.green.unibocconi.eu/wps/wcm/connect/cdr/green/home/

Shyaam Ramkumar

University of Milan ( email )

via Festa del Perdono, 7
Milano
Italy

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