Climate Change Transition Risk on Sovereign Bond Markets

42 Pages Posted: 8 Jun 2021 Last revised: 26 Oct 2021

See all articles by Sierra Collender

Sierra Collender

University of Technology Sydney (UTS)

Christina Sklibosios Nikitopoulos

University of Technology Sydney - Business School; Financial Research Network (FIRN)

Kylie-Anne Richards

University of New South Wales (UNSW) - School of Mathematics and Statistics; University of Technology Sydney (UTS) - UTS Business School

Laura Simone Ryan

University of Technology Sydney (UTS); Australian National University (ANU)

Date Written: October 25, 2021

Abstract

We challenge the narrative that climate change transition risk is not being priced into sovereign bond markets. As measured by carbon dioxide emissions, natural resources rents and renewable energy consumption, climate change transition risk is factored into sovereign bond yields (and spreads) by investors. Using a sample of data from 23 advanced and 16 developing markets from 2000-2019, we show that countries with lower carbon emissions incur a lower risk premium on sovereign borrowing costs. Moreover, advanced countries willing to reduce their earnings from natural resources rents and, to some extent, increase renewable energy consumption are associated with lower sovereign borrowing costs. In contrast, developing countries with a strong dependence on natural resources or restricted renewable energy consumption incur lower sovereign borrowing costs. Thus, advanced economies that perform poorly in managing their climate transition may encounter increased sovereign borrowing costs, liquidity constraints, reduced capacity to effectively manage climate transition and the inability to finance economic recovery from severe climate shocks or natural disasters. The necessity to support developing countries to meet climate change targets also emerges. Given the threat climate change poses to the global economy and the fact that transition risk is materialized much faster than physical risk, we advocate an increase in the significance of climate transition risk factors as determinants of sovereign bond markets.

Keywords: climate change, transition risk, sovereign yields, carbon dioxide, natural resources rents, renewables, GDP

JEL Classification: F34, G15, H63, Q20, Q51

Suggested Citation

Collender, Sierra and Sklibosios Nikitopoulos, Christina and Richards, Kylie-Anne and Richards, Kylie-Anne and Ryan, Laura Simone, Climate Change Transition Risk on Sovereign Bond Markets (October 25, 2021). Available at SSRN: https://ssrn.com/abstract=3861350 or http://dx.doi.org/10.2139/ssrn.3861350

Sierra Collender

University of Technology Sydney (UTS) ( email )

15 Broadway, Ultimo
PO Box 123
Sydney, NSW 2007
Australia

Christina Sklibosios Nikitopoulos (Contact Author)

University of Technology Sydney - Business School ( email )

15 Broadway, Ultimo
Sydney 2007, New South Wales
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Kylie-Anne Richards

University of Technology Sydney (UTS) - UTS Business School ( email )

Sydney
Australia

University of New South Wales (UNSW) - School of Mathematics and Statistics ( email )

Sydney, 2052
Australia

Laura Simone Ryan

University of Technology Sydney (UTS) ( email )

15 Broadway, Ultimo
PO Box 123
Sydney, NSW 2007
Australia

Australian National University (ANU) ( email )

Canberra, Australian Capital Territory 2601
Australia

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