Scandinavian Working Papers in Economics

Working Paper Series,
Sveriges Riksbank (Central Bank of Sweden)

No 409: The low-carbon transition, climate commitments and firm credit risk

Sante Carbone (), Margherita Giuzio (), Sujit Kapadia (), Johannes Sebastian Krämer (), Ken Nyholm () and Katia Vozian ()
Additional contact information
Sante Carbone: Financial Stability Department, Central Bank of Sweden, Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden
Margherita Giuzio: European Central Bank
Sujit Kapadia: European Central Bank
Johannes Sebastian Krämer: European Central Bank
Ken Nyholm: European Central Bank
Katia Vozian: European Central Bank, Helsinki Graduate School of Economics, Hanken School of Economics, Leibniz Institute for Financial Research SAFE

Abstract: This paper explores how the need to transition to a low-carbon economy influences credit risk. It develops a novel dataset covering firms’ greenhouse gas emissions over time alongside information on strategies for managing transition risk, includ ing climate disclosure practices and forward-looking emission reduction targets. It assesses how such metrics influence firms’ credit ratings and their market-implied distance-to-default. High emissions tend to be associated with higher credit risk. But disclosing emissions and setting emission reduction targets are associated with lower credit risk, with the effect somewhat stronger for more ambitious climate commitments. After the Paris agreement, firms most exposed to transition risk also saw their ratings deteriorate relative to otherwise comparable firms, with the effect larger for European than US firms, probably reflecting differential climate policy expectations. These results have policy implications for corporate disclosures and strategies around climate change, and the treatment of climate-related transition risk in the financial sector.

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

JEL-codes: C58; E58; G11; G32; Q51; Q56

Language: English

82 pages, January 1, 2022

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