University of Luxembourg
Carlos A. Ramírez
Federal Reserve Board
It is with great pleasure that we introduce this special issue of The Journal of Credit Risk on “Risk Management and Sustainability in an Era of Pandemic and Climate Change”. We present a small selection of papers from the 15th edition of the Annual Meeting of the Risk, Banking and Finance Society in Bari in July 2022. This issue introduces research that expands our understanding on the relationship between stock returns and firms’ exposure to climate risk; explores the tail sensitivity of US industry returns to changes in the prices of carbon emission allowances; investigates default clusters and credit contagion risk in auto loans; and highlights how environmental, social and governance (ESG) scores relate to the market performance of nonbanking financial institutions (NBFIs).
In the first paper in this issue, “The role of a green factor in stock prices: when Fama and French go green”, Ricardo Gimeno and Clara I. González propose a novel factor model to capture firms’ exposure to climate risk. They show that such a risk is priced in the cross section and that a green factor provides a good proxy for firms’ environmental sustainability. Their results help bridge an important informational gap in our current economic landscape marked by nonuniform climate risk reporting practices and highly fluctuating ESG ratings.
The issue’s second paper, “Tail sensitivity of stocks to carbon risk: a sectoral analysis” by Laura Garcia-Jorcano, Juan-Angel Jimenez-Martin, and Maria-Dolores Robles, studies the tail sensitivity of US industry returns to changes in carbon-driven climate risk. The authors show that such sensitivities vary across industries and across the carbon market’s implementation phases. Their findings, which have direct implications for portfolio diversification, suggest that investors’ perception about an industry’s exposure to transition risk depends on both the climate state and market conditions.
In “Credit contagion risk in German auto loans”, the third paper in the issue, Arved Fenner and Steffen Vollmar analyze a data set encompassing more than 5 million German auto loans and look into default clusters and credit contagion risk. They show that neither loan-, borrower- and asset-specific variables nor macroeconomic factors alone can explain auto loan defaults. Their results reveal that the default of one auto loan can trigger the default of other auto loans. This suggests that contagion effects should be taken into account when evaluating credit risk, which has significant implications for rating agencies, regulators and banks’ risk management of auto loan portfolios.
In our final paper, “Nonbanking financial institutions and sustainability issues: empirical evidence on the impact of environmental, social and governance scores on market performance”, Claudia Cannas, Laura Pellegrini and Andrea Roncella explore the relationship between NBFIs’ market performance and ESG scores. They conduct panel regressions on 415 listed and multinational financial institutions with the aim of demonstrating that enterprises that pursue long-term sustainability benefit not just from a reputational point of view but also from a financial point of view. Rising ESG ratings have a positive impact on the market-to-book-value ratio, with better support for environmental and governance drivers. The impact of the ESG controversy score on the financial performance of NBFIs is found to be negative and significant.
We are confident these papers will be interesting to both academics and practitioners. We hope you enjoy reading them.
The authors propose a means to capture climate change risk exposure by combining a green factor with typical frameworks used for explaining stock returns.
The authors investigate the tail sensitivity of US industry returns in relation to changes of carbon-driven climate risk, finding that tail sensitivities rise with the greenhouse has emissions of an industry.
The authors employ a data set of over 5 million German auto loans to investigate credit contagion risk and show that defaults cannot be attributed to single factors.
Nonbanking financial institutions and sustainability issues: empirical evidence on the impact of environmental, social and governance scores on market performance
The authors investigate relationships between environmental, social and governance scores and market-to-book ratios using data from North American and European nonbanking financial institutions.