Climate Regulatory Risks and Corporate Bonds

Abstract

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 located in a state with stricter regulatory enforcement. Using the Paris Agreement as a shock to expected climate regulations, we provide evidence of a causal relation between climate regulatory risks and bond credit ratings and yield spreads. We also find changes in the composition of institutional ownership changes.

Keywords: Climate Risk, Regulatory Risk, Fixed Income

JEL Classification: G38, G24, G00