Linking Climate Risk to Credit Risk: Evidence from Sectorial Analysis

Abstract

This article addresses the pressing issue of the impact of climate change on credit risk. We take a novel approach by examining a company’s emission category score, which measures its effectiveness in reducing environmental emissions during production and operational processes. The article acknowledges that the effects of climate risk on credit risk may vary across industries, and, thus, conducts a comprehensive sectoral analysis to better understand the industry-specific effects of climate risk. The overall findings indicate a negative relationship between firms’ carbon emissions score and credit risk. However, we document a positive relationship in the Industrials sector. We emphasize the importance of the firm in taking climate risk seriously and incorporating it into their risk management strategies. The findings have significant implications for portfolio managers, socially responsible investors, and policymakers, offering valuable insights for the construction of more resilient and sustainable financial portfolios and systems, all the while mitigating exposure to climate-related risks.

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