Effects of Climate Change and Technological Capex on Credit Risk Cycles in the European Union

Environmental degradation impacts businesses via both transitional and physical risks. Consequently, this can affect the repayment capacity and the default risk profile of the firms. Another factor that may impair the credit quality is the lack of technological adoption in the prevailing VUCA environment. Using a comprehensive sample of firms from the European Union, we assess the interplay of climate change, technology-related capex, and credit risk. Our findings reveal a positive relationship between emissions and the probability of default indicating a degrading impact of climate change. Similarly, we observe that firms with better environmental scores tend to have lower chances of default. Finally, we report a negative association between tech capex and default risk implying that firms that invest in technology have superior credit resilience. The results remain robust for multiple specifications of the default likelihood. We suggest that policymakers and businesses within the EU should strategically address the nexus of climate change and technology to endure more sustainable business models and financial stability within this dynamic region.