Short- and long-term effects of environmental factors on credit risk: evidence from polish publicly listed firms

Climate-related environmental risks increasingly affect the financial sector, yet their influence on credit risk remains insufficiently explored, particularly in emerging markets such as Poland. This study addresses this gap by examining how environmental risk factors, especially carbon emissions and environmental performance indicators, relate to credit risk in publicly listed Polish companies. We investigate whether and how environmental risks—including direct (Scope 1) and indirect (Scope 2 and 3) carbon emissions, as well as ESG Environmental Scores—impact firms’ credit ratings based on internal credit assessment systems (ICAS) in both the short and long term. We further examine whether this relationship differs between firms covered by the EU Emissions Trading System (ETS) and those not covered (Non-ETS). To analyze this relationship, we apply a panel error-correction model (ECM) complemented by multi-level bootstrapped mixed-effects ordered logit models. Given limited availability of environmental data, we address potential sample selection bias using the Heckman correction method. Our findings reveal a significant negative short-run association between environmental risk and credit ratings. Importantly, the relationship between environmental risk and credit risk is more pronounced among ETS-covered firms compared to Non-ETS firms, confirming the hypothesis of heterogeneity by regulatory exposure. Over the long term, the relationship exhibits a nonlinear, parabolic pattern consistent with the Environmental Kuznets Curve (EKC) hypothesis. This suggests that climate-related risks and related regulatory measures exert a complex, non-monotonic influence on credit risk by affecting firms’ profitability and cash flow dynamics. The results provide valuable insights into the multifaceted impact of environmental factors on creditworthiness, highlighting implications for financial stability and credit risk management. These findings emphasize the need for differentiated regulatory and financial approaches depending on firms’ regulatory exposure and environmental risk profiles.