Climate Regulatory Risks and Corporate Bonds

60 Pages Posted: 17 Apr 2020 Last revised: 25 Apr 2022

See all articles by Lee Seltzer

Lee Seltzer

Federal Reserve Bank of New York

Laura T. Starks

University of Texas at Austin - Department of Finance

Qifei Zhu

Nanyang Business School, Nanyang Technological University

Date Written: April 20, 2022

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 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

Seltzer, Lee and Starks, Laura T. and Zhu, Qifei, Climate Regulatory Risks and Corporate Bonds (April 20, 2022). Nanyang Business School Research Paper No. 20-05, FRB of New York Staff Report No. 1014, Available at SSRN: https://ssrn.com/abstract=3563271 or http://dx.doi.org/10.2139/ssrn.3563271

Lee Seltzer

Federal Reserve Bank of New York ( email )

New York, NY
United States

HOME PAGE: http://https://sites.google.com/view/leeseltzer

Laura T. Starks (Contact Author)

University of Texas at Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States
512-471-5899 (Phone)
512-471-5073 (Fax)

Qifei Zhu

Nanyang Business School, Nanyang Technological University ( email )

Singapore, 639798
Singapore

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