The Low-Carbon Transition, Climate Commitments and Firm Credit Risk

70 Pages Posted: 22 Dec 2021

See all articles by Sante Carbone

Sante Carbone

European Central Bank (ECB)

Margherita Giuzio

European Central Bank (ECB)

Sujit Kapadia

Bank of England; European Central Bank (ECB)

Johannes Sebastian Krämer

European Central Bank (ECB)

Ken Nyholm

European Central Bank (ECB)

Katia Vozian

Hanken School of Economics; European Central Bank (ECB); University of Helsinki - Helsinki Graduate School of Economics; Leibniz Institute for Financial Research SAFE

Date Written: December, 2021

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.

Keywords: climate change, credit risk, disclosure, green finance, net zero, transition risk

JEL Classification: E58, G11, G32, Q51, Q56, C58

Suggested Citation

Carbone, Sante and Giuzio, Margherita and Kapadia, Sujit and Kapadia, Sujit and Krämer, Johannes Sebastian and Nyholm, Ken and Vozian, Katia, The Low-Carbon Transition, Climate Commitments and Firm Credit Risk (December, 2021). ECB Working Paper No. 2021/2631, Available at SSRN: https://ssrn.com/abstract=3991358 or http://dx.doi.org/10.2139/ssrn.3991358

Sante Carbone (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Margherita Giuzio

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Sujit Kapadia

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom
020-7601-5507 (Phone)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Johannes Sebastian Krämer

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Ken Nyholm

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Katia Vozian

Hanken School of Economics ( email )

PB 287
Helsinki, Helsinki 65101
Finland

European Central Bank (ECB)

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

University of Helsinki - Helsinki Graduate School of Economics

P.O. Box 17 (Arkadiankatu 7)
Helsinki, FI00014
Finland

Leibniz Institute for Financial Research SAFE

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

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