Climate Change and Corporate Financial Stability

Abstract The paper looks into the impact of firms’ carbon emission on their financial stability, using a unique set of granular data for companies in the Romanian economy. Carbon emissions are important for measuring companies’ carbon footprint, so that the direct and indirect impact on the environment can be assessed and utilized to calculate the impact on banks’ portfolio exposure to climate risk, or estimate the real sector financial stability risks. The paper uses Romanian companies’ financial indicators from the financial statements reported to the Ministry of Finance, along with carbon emissions estimates collected from a robust sample of companies, to reveal the insights into how is the financial stability, measured through the Altman Z-score, impacted by the emission intensity. We confirm the hypothesis that higher carbon emissions have a negative influence on the Z-score of firms, in line with existing literature, for other economies. Further on, we discover that the existence of a governance structure responsible for environmental issues provides a stronger negative effect of increased emissions to financial stability. The study confirms the importance of monitoring carbon emission data at firm level in order to calibrate the corporate credit risk and contributes to the literature through the perspective of analyzing non-listed, smaller firms as well, compared to the majority of the available research, which is looking into data for public listed companies.