Quantifying the Effect of Climate Risk on Credit Ratings
Climate-related and environmental risks receive increasing attention from banking regulators and supervisors. New requirements and expectations on how banks should address these risks are issued on a regular basis. To understand how banks should consider these risks in their methodologies and processes, I studied the effects of a carbon price risk on credit risk. In particular, I present a bottom-up approach to integrate the effects of an increase in carbon prices into the rating assessment. Based on this methodology, the impact on the credit ratings is quantified for a sample of large corporate firms.