Browsing by Subject "credit"

The supervisory expectations directed towards banks and other financial institutions to integrate, identify and manage climate-related risks has increased substantially during the past decade. The transition towards a de-carbonized economy creates risks and opportunities for financial institutions. The European Central Bank (ECB) has identified climate-related risks as one of the key drivers in the euro area requiring a forward-looking approach to be taken into consideration while dealing with these risks. One of the main ongoing tasks in the area is the identification and classification of environmentally sustainable activities. The objective of this Master’s thesis is to examine the effect that the reported greenhouse gas (GHG) emissions and the implementation of an emission reduction strategy have on corporate repayment capacity, calculated through external credit ratings. Previous literature has found a relationship between companies’ creditworthiness and environmental factors, but the results vary depending on the applied variables. The typical approach used in prior studies is the application of aggregated values of environmental, social and governance (ESG) factors or limiting the analysis to specific industries or countries. The theoretical framework for this thesis rests mainly on previous academic research on the topic and publications by supervisory bodies. The data comprises 593 corporations from 37 countries operating in different industries over the years 2015-2019. The value of the probability of default (PD) is deployed as a measure of corporate repayment capacity. The climate-related variables and financial ratios were provided by the Carbon Disclosure Project (CDP) and Standard and Poor’s (S&P). The relationship between corporate repayment capacity and the climate-related variables was analysed using a panel data multivariate regression model, specifically the ordinary least squares (OLS) method. The results of this study indicate that emission intensity levels contribute statistically in a negative and significant way to corporate credit ratings, implying that higher levels of emissions lead to a higher PD. On the other hand, having an emission reduction target contributes positively and significantly to corporate repayment capacity, indicating that having this target leads to a lower PD. The analysed climate-related variables were statistically more significant in industries considered to consist of high emitting companies, as opposed to low emitting ones.