A1895
Title: Does credit risk reflect climate transition risk: Evidence from the CDS market for the utility sector
Authors: Michele Costola - Ca' Foscari University of Venice (Italy) [presenting]
Stefano Battiston - Ca\' Foscari University of Venice (Italy)
Abstract: The low-carbon transition can only be achieved if firms reallocate CAPEX to low-carbon technology. Hence transition risk is the risk arising from the mismanagement of the technological shift. Finance acknowledges climate risk, yet financial investments into high-carbon assets have not decreased, and no substantial differential in risk indicators is reported. We aim to test if the technological profile of firms with respect to the energy transition is reflected in their Credit Default Swap (CDS) spreads. We consider the utility electricity sector, where technologies are readily observable. Specifically, we proxy the technology profile of the percentage of capacity in electricity generation from fossil versus renewable sources and control for usual credit risk drivers. Preliminary findings show that the technology profile has no impact on the CDS spreads globally. However, we find evidence that after the Paris Agreement, high fossil (renewable) utility firms in EU27 are associated with higher (lower) CDS spreads.
