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

Author

Listed:
  • Carbone, Sante
  • Giuzio, Margherita
  • Kapadia, Sujit
  • Krämer, Johannes Sebastian
  • Nyholm, Ken
  • Vozian, Katia

Abstract

This paper explores how the low-carbon transition affects firms' credit ratings and market-implied distance-to-default. We develop a novel dataset covering firms' greenhouse gas emissions alongside climate disclosure and forward-looking emission reduction targets. Panel regression analysis indicates that high emissions are associated with higher credit risk, but that this relationship can be mitigated by disclosing emissions and committing to reduce emissions. After the Paris agreement, firms most exposed to transition risk saw their ratings deteriorate relative to their peers, with the effect larger for European than US firms, probably reflecting differential climate policy expectations. A dynamic difference-in-differences approach also shows that European firms who make a climate commitment subsequently experience an improvement in their credit rating relative to comparable firms who do not set a target. These results have policy implications for corporate disclosure and pricing of transition risk.

Suggested Citation

  • Carbone, Sante & Giuzio, Margherita & Kapadia, Sujit & Krämer, Johannes Sebastian & Nyholm, Ken & Vozian, Katia, 2025. "The low-carbon transition, climate commitments and firm credit risk," SAFE Working Paper Series 442, Leibniz Institute for Financial Research SAFE.
    • Handle: RePEc:zbw:safewp:312432
    DOI: 10.2139/ssrn.5125405
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • Q51 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Valuation of Environmental Effects
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth

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