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Analyzing the Impact of Carbon Risk on Firms’ Creditworthiness in the Context of Rising Interest Rates

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  • Aimee Jean Batoon

    (Department of Statistics and Quantitative Methods, University of Milano-Bicocca, 20126 Milan, Italy)

  • Edit Rroji

    (Department of Statistics and Quantitative Methods, University of Milano-Bicocca, 20126 Milan, Italy)

Abstract

Carbon risk, a type of climate risk, is expected to have a crucial impact, especially on high-carbon-emitting, “polluting” firms as opposed to less carbon-intensive, “clean” ones. With a rising number of actions and policies being continuously proposed to mitigate these concerns and an increasing number of investors demanding more climate adaptation initiatives, this transition risk will certainly need to be incorporated into a firm’s credit risk assessment. In this paper, we explore the impact of the carbon risk factor, constructed as the daily median difference in default protection between polluting and clean European firms, on firm creditworthiness using quantile regressions on the tail distribution of credit default swap spreads for different maturities between 2020 and 2023. In particular, the recent European interest rate hikes lead to unexpected conclusions about when the carbon risk factor affects firm creditworthiness and how rapidly the net-zero economy transition must occur. Contrary to the previous literature, we find that investors are expecting the transition to occur in the medium-to-long term.

Suggested Citation

  • Aimee Jean Batoon & Edit Rroji, 2024. "Analyzing the Impact of Carbon Risk on Firms’ Creditworthiness in the Context of Rising Interest Rates," Risks, MDPI, vol. 12(1), pages 1-21, January.
  • Handle: RePEc:gam:jrisks:v:12:y:2024:i:1:p:16-:d:1323982
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    References listed on IDEAS

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    1. Juhyun Jung & Kathleen Herbohn & Peter Clarkson, 2018. "Carbon Risk, Carbon Risk Awareness and the Cost of Debt Financing," Journal of Business Ethics, Springer, vol. 150(4), pages 1151-1171, July.
    2. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-470, May.
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