IDEAS home Printed from https://ideas.repec.org/a/eee/finlet/v105y2026ics1544612326007634.html

When do carbon emissions matter for sovereign ratings? Governance and the pricing of transition risk

Author

Listed:
  • Sarto, Nicola Del

Abstract

This paper investigates whether sovereign credit ratings uniformly price carbon transition risk. Using a panel of 145 countries from 2002 to 2024, we show that rating agencies penalize CO2 emissions only in countries with strong institutional quality. In weak governance nations, carbon exposure remains unpriced. This asymmetry suggests that sovereign transition risk is conditional on state capacity: high emissions threaten creditworthiness only when governments can credibly implement decarbonization policies. Our findings, which are robust to alternative proxies, estimators, and lagged effects, highlight that domestic governance is a crucial mechanism in the financial pricing of sovereign climate risk.

Suggested Citation

  • Sarto, Nicola Del, 2026. "When do carbon emissions matter for sovereign ratings? Governance and the pricing of transition risk," Finance Research Letters, Elsevier, vol. 105(C).
    • Handle: RePEc:eee:finlet:v:105:y:2026:i:c:s1544612326007634
    DOI: 10.1016/j.frl.2026.110235
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1544612326007634
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.frl.2026.110235?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to

    for a different version of it.

    More about this item

    Keywords

    ;
    ;
    ;
    ;
    ;
    ;

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:finlet:v:105:y:2026:i:c:s1544612326007634. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/frl .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.