Climate Regulatory Risks and Corporate Bonds
68 Pages Posted: 17 Apr 2020 Last revised: 27 Dec 2023
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Climate Regulatory Risks and Corporate Bonds
Climate Regulatory Risks and Corporate Bonds
Date Written: April 20, 2022
Abstract
Investor and policymaker concerns about climate risks suggest these risks should affect the risk assessment and pricing of corporate securities, particularly for firms facing stricter regulatory enforcement. Using corporate bonds, we find support for this hypothesis. Employing a shock to expected climate regulations, we show climate regulatory risks causally affect bond credit ratings and spreads. A structural credit model indicates the increased spreads for high carbon issuers, especially those located in stricter regulatory environments, are driven by changes in firms’ asset volatilities rather than asset values, highlighting that regulatory uncertainty affects security pricing. The results have important implications for policy-making.
Keywords: Climate Risk, Regulatory Risk, Fixed Income
JEL Classification: G38, G24, G00
Suggested Citation: Suggested Citation