Work

Carbon risk and corporate creditworthiness: Evidence from a major emerging economy

Year: 2026

Type: article

Abstract: We examine the relationship between climate-related transition risk and the creditworthiness of non-financial Indian firms. We find that higher emissions are associated with significantly higher market-implied probabilities of default (PD), and that this association becomes stronger after the Paris Agreement. Firms misaligned with Paris-consistent decarbonization pathways and those with greater exposure to prospective carbon pricing exhibit elevated credit risk. The magnitude of the association varies with firm characteristics: stronger financial positions, robust ESG practices, and higher investment capacity attenuate the positive association between emissions and PD. Reputational exposure and the cost of equity emerge as significant channels linking emissions to default risk, whereas no meaningful effect is detected through the cost of debt. These results highlight the growing importance of transition risk in emerging markets and highlight mechanisms through which investors incorporate firm-level environmental exposure into credit risk assessments.

Source: Energy Economics

DOI: 10.1016/j.eneco.2026.109315

Authors: Marcin Borsuk, Gireesh Shrimali

Institutions: Instytut Nauk Ekonomicznych, University of Oxford, University of Bologna, Polish Academy of Sciences

Language: English

Topic: Sustainable Finance and Green Bonds

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

SDG: Climate action

Open Access status: hybrid

Estimated APC paid: $4,280