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

We examine how firms’ carbon risk management practices influence market assessment of their credit risk. Using two quasi-exogenous events involving the 2015 Paris Climate Agreement and the staggered implementation of US state climate adaptation plans, we find that stronger carbon risk management is associated with significantly lower CDS spreads. Our results are not driven by firm-level climate exposures, leverage, and social-, governance- or distress- risks. Firms with better carbon risk management also exhibit enhanced future growth opportunities and cash holdings, and lower subsequent carbon emissions. Overall, our paper highlights the importance of carbon risk management in mitigating credit risk.