Do Firms Benefit from Carbon Risk Management? Evidence from the Credit Default Swaps Market

We examine the effect of firms’ carbon risk management practices on their credit risk. Using difference-in-differences analysis based on two quasi exogenous events involving the 2015 Paris Climate Agreement and the staggered implementation of US state climate adaptation plans, we find that better carbon risk management is associated with significantly lower credit default swap (CDS) spreads. The influence of carbon risk management performance on CDS spreads is not driven by governance factors, firm-level climate change exposures, leverage, or distress risks Firms with better carbon risk management also have enhanced future growth opportunities and cash holdings. Overall, our paper highlights the importance of carbon risk management in mitigating credit risk