Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/249904 
Year of Publication: 
2021
Series/Report no.: 
ECB Working Paper No. 2631
Publisher: 
European Central Bank (ECB), Frankfurt a. M.
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' green-house gas emissions over time with information on climate disclosure practices and forward-looking 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 expectations around climate policy. These results have policy implications for corporate disclosures and strategies around climate change and the treatment of the climate-related transition risk faced by the financial sector.
Subjects: 
climate change
transition risk
disclosure
net zero
green finance
credit risk
JEL: 
E58
G11
G32
Q51
Q56
C58
Persistent Identifier of the first edition: 
ISBN: 
978-92-899-4918-7
Document Type: 
Working Paper

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