Circular Economy and Default Risk

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