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

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Authors: Marcin Borsuk, Gireesh Shrimali
Cited by: 3
References: 44

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.

Fields of Study & Subjects

Corporate Social Responsibility Reporting Sustainable Finance and Green Bonds Corporate Finance and Governance

Publication details

Journal / source
Energy Economics
Publisher
Elsevier BV
Volume
158
Pages
109315–109315
Publication date
31 March 2026
Language
EN