Climate change exposure, circular economy and default probability: global evidence

This study investigates how climate change exposure and circular economy (CE) practices jointly influence corporate default risk, employing a global dataset of publicly traded firms from 61 economies spanning 2003–2023. The findings support that climate exposure significantly increases corporate default risk. The result further reveals that the effect of climate exposure is amplified over medium and long-term horizons which supports the role of physical damages, regulatory costs and transition risks on the financial outcome. Conversely, engagement in CE activities – such as resource efficiency, emissions reduction, responsible product management and environmental innovation – is associated with substantially lower default risk. This highlights the role of CE in enhancing corporate financial resilience. Importantly, this study's findings demonstrate an essential moderating role of corporations engaging in CE strategies in buffering the adverse financial implications of climate exposure. I further perform several robustness tests – falsification test, propensity score matching (PSM) to ensure the result validity. The direct impact of this study is to promote a more sustainable financial system by integrating climate risk and CE practices into credit risk assessment. Additionally, the results highlight the need to adopt CE concepts in credit risk frameworks and strategic risk management, enhancing the knowledge of corporate leaders, investors and regulators.