Pricing climate transition risk: evidence from European Corporate CDS

  • The European low-carbon transition began in the last few decades and is accelerating to achieve net-zero emissions by 2050. This paper examines how climate-related transition indicators of a large European corporate firm relate to its CDS-implied credit risk across various time horizons. Findings show that firms with higher GHG emissions have higher CDS spreads at all tenors, including the 30-year horizon, particularly after the 2015 Paris Agreement, and in prominent industries such as Electricity, Gas, and Mining. Results suggest that the European CDS market is currently pricing, to some extent, albeit small, the exposure to transition risk for a firm across different time horizons. However, it fails to account for a company’s efforts to manage transition risks and its exposure to the EU Emissions Trading Scheme. CDS market participants seem to find challenging to risk-differentiate ETS-participating firms from other firms.

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Author:Katia Vozian, Michele CostolaORCiD
Series (Serial Number):SAFE working paper (387)
Place of publication:Frankfurt am Main
Document Type:Working Paper
Year of Completion:2023
Year of first Publication:2023
Publishing Institution:Universitätsbibliothek Johann Christian Senckenberg
Release Date:2023/05/31
Tag:climate change; credit default swap; credit risk; emissions trading system (ETS); financial markets; transition risk
Edition:May 2023
Page Number:91
Institutes:Wirtschaftswissenschaften / Wirtschaftswissenschaften
Wissenschaftliche Zentren und koordinierte Programme / House of Finance (HoF)
Wissenschaftliche Zentren und koordinierte Programme / Center for Financial Studies (CFS)
Wissenschaftliche Zentren und koordinierte Programme / Sustainable Architecture for Finance in Europe (SAFE)
Dewey Decimal Classification:3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft
JEL-Classification:D Microeconomics / D5 General Equilibrium and Disequilibrium / D53 Financial Markets
E Macroeconomics and Monetary Economics / E5 Monetary Policy, Central Banking, and the Supply of Money and Credit / E58 Central Banks and Their Policies
G Financial Economics / G0 General / G01 Financial Crises (Updated!)
G Financial Economics / G3 Corporate Finance and Governance / G32 Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure
Q Agricultural and Natural Resource Economics; Environmental and Ecological Economics / Q5 Environmental Economics / Q51 Valuation of Environmental Effects
Licence (German):License LogoDeutsches Urheberrecht