The low-carbon transition, climate commitments and firm credit risk

Abstract

working paper series sante carbone, margherita giuzio, sujit kapadia, johannes sebastian krämer, ken nyholm, katia vozian the low-carbon transition, climate commitments and firm credit risk no 2631 / december 2021 disclaimer: this paper should not be reported as representing the views of the european central bank (ecb). the views expressed are those of the authors and do not necessarily reflect those of the ecb. 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’ greenhouse gas emissions over time with information on climate disclosure practices and forwardlooking 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 …

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