Climate Regulatory Risks and Corporate Bonds
60 Pages Posted: 17 Apr 2020 Last revised: 25 Apr 2022
Date Written: April 20, 2022
Investor concerns about climate and other environmental regulatory risks suggest that these risks should affect corporate bond risk assessment and pricing. We test this hypothesis and find that firms with poor environmental profiles or high carbon footprints tend to have lower credit ratings and higher yield spreads, particularly when their facilities are located in states with stricter regulatory enforcement. Using the Paris Agreement as a shock to expected climate risk regulations, we provide evidence that climate regulatory risks causally affect bond credit ratings and yield spreads. Accordingly, the composition of institutional ownership also changes after the Agreement.
Keywords: Climate Risk, Regulatory Risk, Fixed Income
JEL Classification: G38, G24, G00
Suggested Citation: Suggested Citation