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The Interrelationship of Credit and Climate Risks

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  • Henry Penikas

    (Bank of Russia, Russian Federation)

Abstract

The focus of our study is the environmental (E) risk score. For this paper, we have collected a unique database of public ESG ratings for the world largest companies in the Fortune Global 2000 list. The credit risk estimates are derived from publicly available credit ratings. The probability of default (PD) levels result from the use of historical default data. We control for the specifics of industries and sectors. The availability of E-risk data for half of the sample implies the need to apply the Heckman selection model. We show cases when the climate-credit risk relationship is robustly positive for a particular industry and region: in such cases, loan subsidies are indeed advisable to finance large green projects and green corporations (e.g. the 2021 Bank of Japan program Ð though it was tailored for SMEs). Otherwise Ð in the predominant number of cases Ð such a loan rate reduction may foster the accumulation of credit risks and pose a threat to financial stability. We contribute to the literature by showing that the revealed positive climate-credit risks dependence is not ubiquitous Ð which is argued by (Capasso, Gianfrate, & Spinelli, 2020).

Suggested Citation

  • Henry Penikas, 2022. "The Interrelationship of Credit and Climate Risks," Bank of Russia Working Paper Series wps100, Bank of Russia.
    • Handle: RePEc:bkr:wpaper:wps100
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    References listed on IDEAS

    as
    1. Heckman, James, 2013. "Sample selection bias as a specification error," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 31(3), pages 129-137.
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    More about this item

    Keywords

    green company; brown company; Sustainalytics; carbon dioxide emissions; Heckman.;
    All these keywords.

    JEL classification:

    • C24 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Truncated and Censored Models; Switching Regression Models; Threshold Regression Models
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • O44 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Environment and Growth

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