Faralli and Rugierro (2023)

Faralli, Matilfe, and Francesco Ruggiero. “The Rise of Climate Risks: Evidence on Firms' Expected Default Frequencies.” Working paper (Imperial College London), July 2023.

From the authors' abstract: “This paper studies the relationship between climate transition risk and credit risk, proxied by firms' emission levels and Moody's Expected Default Frequencies (EDFs), respectively. In regressing Moody's EDFs on firms' emission levels, we find a negative correlation between emissions and default risk… [L]arge emitters are charged a higher risk premium within sectors but not across sectors. By breaking down Moody's EDFs into their main components, we identify the channels through which transition risk affects the EDF. First, we show that carbon emissions are relevant for the probability of default, especially through the asset volatility channel. Second, we provide evidence that the 2015 Paris Agreement marked a turning point that reverberated on firms’ credit risk…”

Link:  https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4144802