Climate Regulatory Risks and Corporate Bonds

RePEc Short ID: pzh514
ORCID iD: 0000-0002-4047-461X

Seltzer, Lee; Starks, Laura; Zhu, Qifei

Report

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 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 risks; regulatory risk; fixed income;

JEL Classification: G38; G24; G00;