SAFE Working Paper No. 387

Pricing Climate Transition Risk: Evidence from European Corporate CDS

The European low-carbon transition began in the last few decades and is accelerating to

achieve net-zero emissions by 2050. This paper examines how climate-related transition

indicators of a large European corporate firm relate to its CDS-implied credit risk across

various time horizons. Findings show that firms with higher GHG emissions have higher

CDS spreads at all tenors, including the 30-year horizon, particularly after the 2015 Paris

Agreement, and in prominent industries such as Electricity, Gas, and Mining. Results

suggest that the European CDS market is currently pricing, to some extent, albeit small,

the exposure to transition risk for a firm across different time horizons. However, it fails

to account for a company’s efforts to manage transition risks and its exposure to the

EU Emissions Trading Scheme. CDS market participants seem to find challenging to

risk-differentiate ETS-participating firms from other firms.