Abstract
An unexpected climate change policy event of "disorderly" transition is a systemic source of risk, common to all the companies exposed to climate change. The severity of this risk is instead firm-specific. We extract a CDS-based index of common default probability shocks in a set of firms of the energy and oil sector and controlling for a set of common risk factors we identify a proxy for transition risk. The severity impact is then evaluated by regressing out-of-the-money (OTM) put options of different maturities on unexpected shocks of the CDS-based transition risk index. The responses estimated from what we have labeled as Implied Local Projections (ILP) provide a measure of how long the effect of the shock is expected to persist based on the information implied in OTM put option quotes. In a sample comprising 31 European firms from the Energy and Oil & Gas sectors we identify a significant common shock component in a set of five firms (ENI, BP, Shell, Total and Repsol). This common component is used to identify a transition risk shock. In a cross-section analysis, the severity is found significant for 12 firms. In the term structure analysis, the ILP yields significant results across all maturities (indicating a persistent effect) in three cases (ENI, Total and Fuchs). Additionally, we find a transitory effect for Shell and BP, while no significant impacts are found for the remaining firms.