Climate transition risk in determining credit risk: evidence from firms listed on the STOXX Europe 600 index

Abstract

This paper assesses whether a climate factor is relevant to measure default risk in a sample of main companies listed on the STOXX Europe 600 exchange from 2010 to 2020. The starting point is a factorial panel data model which is subsequently modified to capture the climate impact through different functional forms. We find that relevant differences in default risk exist before and after the Paris Agreement. Our analysis also indicates that this difference cannot be explained by means of traditional financial factors. Finally, we further show that a climate change risk and opportunities label is a significant factor in evaluating credit risk, both prior to and post-Paris agreement. These results are important to the extent that they suggest that companies' market performance itself allows to measure differences in credit risk between companies and to link them with climate risk factors. This approach may be useful as a complement or in combination with the traditional use of exogenous climate factors that have been widely used in the literature in this field.