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.
