Climate Regulatory Risks and Corporate Bonds
57 Pages Posted: 17 Apr 2020
Date Written: March 28, 2020
Examining how climate and other environmental regulatory risks affect bond risk and pricing, we find that bond credit ratings and yield spreads appear to be influenced by a firm's environmental performance along with its regulatory conditions. Firms with poor environmental profiles tend to have lower credit ratings and higher yield spreads, particularly when the firm is located in a state with more stringent environmental regulations. Using the Paris Agreement as a shock to expected climate regulation, we provide evidence of a causal relation between climate regulatory risks and the credit ratings and yield spreads of bonds with problematic environmental profiles.
Keywords: Climate Risk, Regulatory Risk, Fixed Income
JEL Classification: G38, G24, G00
Suggested Citation: Suggested Citation