A faster and more aggressive shift towards net-zero emissions could increase corporate credit risks across ASEAN+3 economies, particularly in energy-intensive sectors, while a more gradual climate transition may give companies greater time to adjust their operations and financial positions, according to the ASEAN+3 Macroeconomic Research Office (AMRO) analytical note on Thursday.
AMRO said its analysis showed that climate transition risks were highly uneven across sectors, countries and policy pathways, with the impact on firms’ 12-month probabilities of default (PDs) depending on the pace of policy tightening, carbon pricing, energy substitution and companies’ financial resilience.
Under a Nationally Determined Contributions (NDC) pathway, firms’ median 12-month PDs could decline relative to a Current Policies scenario in many cases, suggesting that a gradual and predictable transition could allow companies to adapt through changes in energy use and the strengthening of financial buffers.
By contrast, the net-zero 2050 (NZE) pathway could result in significantly higher PDs, with the sharpest pressures concentrated in sectors exposed to energy transformation, carbon pricing and balance-sheet adjustments, AMRO said in a note published on Sept 24.
The findings highlight that tighter climate policies do not automatically translate into higher corporate default risk, with the eventual impact depending on how quickly firms need to adjust and their ability to absorb the associated costs.
“Transition risk is highly heterogeneous across scenarios,” AMRO said.
Climate transition has increasingly become a macro-critical financial risk as governments introduce policies aimed at reducing greenhouse gas emissions, including carbon pricing mechanisms, restrictions on carbon-intensive activities and incentives for cleaner technologies.
For companies, the transition can increase operating costs through higher energy and carbon prices, while changes in consumer demand and production structures could affect revenues. Long-lived assets could also face valuation pressures if they become uneconomic or obsolete under a lower-carbon economy.
AMRO said these pressures were particularly relevant for ASEAN+3 economies because their production structures, financial systems and energy mixes differed significantly.
The region includes economies with diversified industrial bases and developed financial markets, alongside countries with greater reliance on energy-intensive industries and natural resources.
As a result, the same climate policy could produce different effects on corporate creditworthiness depending on a company’s sector, country, financial position and ability to substitute towards lower-carbon energy sources.
AMRO’s analysis translates climate transition scenarios into firm-level PDs, a measure of the likelihood that a company will default on its debt obligations over a specified period.
The framework starts with three climate pathways — Current Policies, NDC and NZE — which incorporate different assumptions about carbon prices, energy demand, the energy mix and technological developments.
These climate-related shocks are then incorporated into companies’ financial statements by adjusting factors including operating costs, revenues, assets, liabilities and net income.
The resulting changes in firms’ liquidity, profitability and relative size are used to estimate future default risk through the Forward Intensity Model.
The analysis also generates fair-value credit spreads and a credit cycle index, although AMRO focused on the 12-month PD because it provides a firm-level measure that allows credit risks to be examined across individual companies, sectors and economies.
Under the NZE pathway, carbon-intensive companies could face a combination of higher production costs, weaker demand for carbon-intensive products and potential losses in the value of assets that become stranded.
These pressures could weaken corporate financial fundamentals and, in turn, increase default probabilities.
AMRO said the effects were likely to be particularly pronounced in utilities, energy, financials, materials and industrials.
For example, utilities emerged as an important source of higher PDs in China by 2040, while Singapore saw more prominent increases in Financials and Technology.
The variation reinforces the importance of looking beyond economy-wide credit indicators, AMRO said.
Under the current policies scenario, relatively higher baseline PDs were concentrated in sectors such as communications, energy, technology and materials across ASEAN+3 economies.
This suggested that existing production structures, energy dependence and financial conditions already create differences in corporate credit risk before additional climate-transition pressures are applied.
The NDC pathway produced generally smaller changes in PDs and, in many cases, lower PDs compared with Current Policies.
AMRO said this could reflect the more orderly adjustment path under the NDC scenario, which gives companies more time to change their operations, substitute energy inputs and absorb higher costs.
However, the research office cautioned that the findings should not be interpreted as evidence that climate policies necessarily reduce credit risk.
Instead, the results could partly reflect assumptions embedded in the underlying climate scenarios and the analytical framework.
Carbon pricing remains an important factor in determining companies’ exposure to transition risks.
AMRO’s analysis showed that carbon price trajectories differed substantially between the NDC and NZE scenarios. Under the NDC pathway, carbon prices increase more gradually and remain relatively flat after 2030, while the NZE pathway assumes significantly higher and more persistent increases.
For example, Japan’s carbon price could reach about $180 per ton of carbon dioxide equivalent by 2030 under the NDC scenario and remain relatively stable thereafter. Under the NZE pathway, it could rise to around US$300 per ton by 2030 and continue increasing gradually.
Higher carbon prices would raise the relative cost of carbon-intensive energy sources, particularly coal, encouraging companies to shift towards lower-emission alternatives where technically and economically feasible.
AMRO said this substitution effect could cushion some of the impact of higher carbon costs.
The transition away from fossil fuels is also unlikely to occur at the same pace across all energy sources.
Under the NDC scenario, fossil-fuel demand remains relatively resilient in the near term, particularly for oil and gas. Under the NZE scenario, coal faces the sharpest early adjustment, while significant reductions in oil and gas demand occur after 2030.
AMRO noted that China had policies targeting peaks in coal and oil use by 2030, while Indonesia’s coal phase-out would extend towards 2040 and Japan would gradually reduce its reliance on coal-fired power generation through 2030.
For companies, the ability to adjust their energy mix could therefore influence whether higher carbon costs result in a material deterioration in profitability and creditworthiness.
Beyond external policy pressures, AMRO said companies’ own financial strength was an important buffer against climate-related shocks.
The analysis found a negative relationship between liquidity and profitability and firms’ default risk. Companies with higher current ratios and stronger returns on assets (ROA) generally recorded lower 12-month PDs.
The relationship became somewhat stronger under more severe climate-transition scenarios, suggesting that liquidity buffers could become more valuable as firms face greater adjustment pressures.
Profitability appeared to have an especially systematic relationship with credit risk, with firms in lower-PD groups generally showing stronger ROA than those in higher-risk groups.
By contrast, firm size and market-to-book value (MBV) showed weaker relationships with default risk.
AMRO said relative size alone did not guarantee resilience to climate risks, particularly under the NZE scenario.
Similarly, MBV, which reflects market expectations about a company’s future prospects, showed a less consistent relationship with PD than accounting-based measures such as liquidity and profitability.
The analysis also showed that climate-related shocks could widen the differences between companies.
Although the relative ranking of firms broadly remained unchanged across scenarios, high-risk companies tended to experience larger increases in PD as transition pressures intensified.
Companies that already had weak liquidity, lower profitability or limited financial flexibility under Current Policies were therefore more exposed to higher default risks under the NDC and NZE pathways.
AMRO said this suggested that climate transition risks could amplify existing corporate vulnerabilities rather than affecting all companies uniformly.
The findings have implications for policymakers, financial regulators and lenders across ASEAN+3.
AMRO said climate policy should be accompanied by measures that support an orderly adjustment and strengthen corporate resilience.
For financial regulators, this means monitoring transition risks at both sector and firm levels, rather than relying solely on economy-wide indicators.
Sector-level assessments can identify industries most exposed to carbon pricing, energy transformation and changing demand, while firm-level financial indicators can help distinguish companies with greater capacity to absorb transition costs.
AMRO also pointed to the value of sector-specific credit surveillance and incorporating climate stress tests into supervisory frameworks.
Encouraging companies to maintain adequate financial buffers could also help limit the transmission of climate-transition shocks into broader financial-sector vulnerabilities.
The research office said managing the pace of the transition would be important as ASEAN+3 economies pursue their climate objectives.
The analysis suggests that the financial consequences of climate policy will depend not only on the ambition of decarbonization targets, but also on the speed of adjustment and the ability of companies to adapt.
For investors and lenders, AMRO’s findings indicate that assessing climate exposure increasingly requires consideration of both external transition pressures and internal corporate financial strength.
As the region moves towards lower-carbon economies, the ability of companies to withstand higher costs, adjust their energy consumption and maintain profitability and liquidity could determine how climate-transition pressures translate into credit risk.
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