Pricing Climate Change Risk in Corporate Bonds
51 Pages Posted: 7 Apr 2021 Last revised: 8 Apr 2021
Date Written: March 31, 2021
Using a firm’s geographic footprint to measure its exposure to sea level rise (SLR), I find that corporate bonds bear a climate risk premium upon issuance. A one standard deviation increase in firms’ SLR exposure is associated with a 7 basis point premium, representing a 3% increase in average yield spread. This effect is more pronounced for geographically concentrated firms, within industries vulnerable to extreme weather conditions, and after the Paris Agreement. I do not find evidence that credit rating agencies account for SLR exposure at bond issuance. Results are robust to placebo tests and inverse propensity weighting to address possible endogeneity.
Keywords: Climate Risk, Corporate Bonds, Sea Level Rise
JEL Classification: Q54, G14, G24 L51
Suggested Citation: Suggested Citation