Assessing corporate transition risk: The effects of price elasticity of demand : How the credit risks of the corporate portfolios of banks are affected by the transition towards a low-carbon economy and the influence of price elasticity of demand

This study analyzes the impact of the low-carbon transition on business credit risk, driven by new European regulations requiring large companies and banks to assess Environmental, Social, and Governance (ESG) risks, with a focus on climate-related risks. A framework integrating price elasticity of demand (PED) with carbon pricing, energy consumption, and carbon capture and storage (CCS) was developed to assess emissions across Scope 1, 2, and 3. Using scenarios from the Network for Greening the Financial System (NGFS), financial impacts on six companies—Vattenfall, Tata Steel, Maersk, Vitens, FrieslandCampina, and Boliden—were modeled. Results show that companies with inelastic products can mitigate default risk by passing on costs, although this is not a viable strategy for all. Companies with high Scope 1 emissions are most sensitive to carbon pricing, while those with high Scope 3 emissions face persistent risks. The Altman Z-scores indicate that most companies must adopt additional mitigation strategies to manage transition-related default risks effectively. The study contributes to the literature by combining PED with emissions analysis, offering a more tailored assessment of transition risks, and highlights the need for future research to incorporate PED into advanced credit risk models and explore additional elasticities.