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The interrelationship between climate and credit risks at the asset (borrower) level
The focus of our study is the environmental risk score (E-risk or climate (change) risk). For this paper, we have collected a unique database of public ESG ratings for the world’s 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 are derived from the use of historical default data. We control for the specifics of industries and sectors. We are the first to focus on data censoring for climate change risk data. The E-risk data is available for only half of the sample, that is why we apply the Heckman selection model as our research method. We identify cases in which the climate change and credit risk relationship is robustly positive for particular industries and regions: in such cases, loan subsidies are indeed advisable for financing large green projects and green corporations (e.g., the 2021 Bank of Japan programme, although it was tailored for SMEs). Otherwise – the predominant number of cases – such a reduction in loan rates may foster the accumulation of credit risks and pose a threat to financial stability. We contribute to the literature by showing that the positive dependence between climate change and credit risks revealed is not ubiquitous. We argue that a positive interrelationship is typical for the energy sector and oil-exporting regions, while it is absent or even negative for other sectors and regions.