IMPACT OF CLIMATE TRANSITION RISK ON FIRM-LEVEL CREDIT RISK: THE CASE OF INDIA’S STEEL COMPANIES

Paper Number :WP44/2024
Publication Date :May 23, 2024

Our paper designs a forward-looking, default probability measure to quantify transition risk for carbon-intensive companies. We establish using this metric for Indian steel companies, that extreme transition shocks from global climate mitigation policies, can substantially worsen firm-level credit risk. The extent of impact depends upon the company’s unique profile in terms of business, carbon footprint and emission reduction plans. The metric – climate-adjusted EDF, finds a large number of applications in banks’ internal climate-related financial risk assessment. Policy makers and financial market regulators too can adopt the metric for conducting climate stress tests at the sectoral and macro level.