Impact Of Climate Regulations Uncertainty on Default Risk of ESG Firms: Evidence From USA

Abstract/Description

Climate change is widely recognized as a significant global concern. Climate hazards have the potential to exert inescapable impact on various economic sectors, particularly financial markets (Lee et al., 2021). The majority of nations have made commitments to intensify their efforts in addressing the issue of climate change. Specifically, the environmental pillar of ESG score is gaining the prominence as an instrument to link investment objectives with a net-zero emission targets. Besides, various measurement strategies and products in financial markets have emerged globally that provide great assistance to investors so that they can align their portfolio with recent climate objectives by playing their active part to compliance with the Paris Agreement 2016 (Savaresi, 2016) and CoP28 (WEF, 2023). In spite of major advancements made, there are still substantial obstacles that impede the ability of these techniques to effectively contribute to the long term global ecological goals. Problems are particularly evident in relation to ESG investment such as the default risk of investment in the face of climate policies uncertainties. Additionally, there are two major risks associated with climate change 1). Physical risk 2). Transition risk. Transition risk adversely affect the highly committed corporations cash flows and assets as they shift their commitments from traditional to climate friendly investments decisions (Cervest, 2023). Moreover, the financial implications of this necessary transition to a carbon-free businesses result in increased costs, decreased income, and the need for asset revaluation which in turn adversely affect corporate risk-profile. This motivates us to find out the complex dynamics of climate policy uncertainty and default risk of ESG firms. This study will evaluate the default risk of US based listed ESG firms over the period from 2014 to 2023 by utilizing two stage least square and System GMM robust approaches to cater the issues of endogeneity.

Track

Finance

Session Number/Theme

4A: Finance

Session Chair

Dr. Saqib Sharif ; Dr. Mujeeb Bhayo

Start Date/Time

31-5-2024 9:00 AM

End Date/Time

31-5-2024 10:30 AM

Location

MCS – 3 AMAN CED Building

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May 31st, 9:00 AM May 31st, 10:30 AM

Impact Of Climate Regulations Uncertainty on Default Risk of ESG Firms: Evidence From USA

MCS – 3 AMAN CED Building

Climate change is widely recognized as a significant global concern. Climate hazards have the potential to exert inescapable impact on various economic sectors, particularly financial markets (Lee et al., 2021). The majority of nations have made commitments to intensify their efforts in addressing the issue of climate change. Specifically, the environmental pillar of ESG score is gaining the prominence as an instrument to link investment objectives with a net-zero emission targets. Besides, various measurement strategies and products in financial markets have emerged globally that provide great assistance to investors so that they can align their portfolio with recent climate objectives by playing their active part to compliance with the Paris Agreement 2016 (Savaresi, 2016) and CoP28 (WEF, 2023). In spite of major advancements made, there are still substantial obstacles that impede the ability of these techniques to effectively contribute to the long term global ecological goals. Problems are particularly evident in relation to ESG investment such as the default risk of investment in the face of climate policies uncertainties. Additionally, there are two major risks associated with climate change 1). Physical risk 2). Transition risk. Transition risk adversely affect the highly committed corporations cash flows and assets as they shift their commitments from traditional to climate friendly investments decisions (Cervest, 2023). Moreover, the financial implications of this necessary transition to a carbon-free businesses result in increased costs, decreased income, and the need for asset revaluation which in turn adversely affect corporate risk-profile. This motivates us to find out the complex dynamics of climate policy uncertainty and default risk of ESG firms. This study will evaluate the default risk of US based listed ESG firms over the period from 2014 to 2023 by utilizing two stage least square and System GMM robust approaches to cater the issues of endogeneity.