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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 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.
About the Speaker
Margherita Giuzio is a Senior Financial Stability Expert in the Market-Based Finance division of the European Central Bank. She joined the ECB after completing a PhD in financial econometrics at the European Business School, Universität für Wirtschaft und Recht. Her research interests include non-bank financial intermediation, climate-related risks to financial stability and sustainable finance.
At this event
Director of the Qatar Centre for Global Banking & Finance
Advisor, Qatar Centre for Global Banking & Finance
Deputy Director of the Qatar Centre for Global Banking & Finance
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