Is Climate Transition Risk Priced into Corporate Credit Risk? Evidence from Credit Default Swaps
Andrea Ugolini (Department of Economics, Management and Statistics, University of Milano-Bicocca); Juan C. Reboredo (Universidade de Santiago de Compostela, Department of Economics, ECOBAS Research Center); Javier Ojea-Ferreiro (Bank of Canada)
C24, G12, G32, Q54
Climate transition risk, CDS spreads, credit risk
We study whether climate transition risk is reflected in the credit default swap (CDS) spreads of firms. Using information on the vulnerability of a firm’s value to the transition to a low carbon economy, we construct a climate transition risk (CTR) factor, and document how this factor shifts the term structure of the CDS spreads of more vulnerable firms but not of less vulnerable firms. Considering the impact of different climate transition policies on the CTR factor, we find that they have asymmetric and significant economic impacts on the credit risk of more vulnerable firms, and negligible effects on the remaining firms.
Suggested citation: A. Ugolini, J. C. Reboredo, J. Ojea-Ferreiro, ‘Is climate transition risk priced into corporate credit risk? Evidence from credit default swaps’, Nota di Lavoro 04.2023, Milano, Italy: Fondazione Eni Enrico Mattei