Climate Change News Risk and Corporate Bond Returns

Abstract

We examine whether climate change news risk is priced in corporate bonds. We estimate bond covariance with climate change news index and find that bonds with a higher climate change news beta earn lower future returns, consistent with the asset pricing implications of demand for bonds with high potential to hedge against climate risk. Moreover, when investors are concerned about climate risk, they are willing to pay higher prices for bonds issued by firms with better environmental performance. Our findings suggest that corporate policies aimed at improving environmental performance pay off when the market is concerned about climate change risk.

Keywords: Corporate bond returns, climate change news index, intertemporal hedging demands, environmental performance

JEL Classification: G11, G12, G13, Q54