Staff Reports
Climate Regulatory Risks and Corporate Bonds
Number 1014
April 2022 Revised January 2024

JEL classification: G38, G24, G00

Authors: Lee Seltzer, Laura T. Starks, and Qifei Zhu

Investor and policymaker concerns about climate risks suggest these risks should affect the risk assessment and pricing of corporate securities, particularly for firms facing stricter regulatory enforcement. Using corporate bonds, the authors find support for this hypothesis. Employing a shock to expected climate regulations, they show climate regulatory risks causally affect bond credit ratings and spreads. A structural credit model indicates that the increased spreads for high carbon issuers, especially those located in stricter regulatory environments, are driven by changes in firms' asset volatilities rather than asset values, highlighting that regulatory uncertainty affects security pricing. The results have important implications for policy-making.

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Author Disclosure Statement(s)
Lee Seltzer
Lee Seltzer declares that he has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at

Laura T. Starks
Laura T. Starks has not received financial support specifically sponsoring this research.

Qifei Zhu
Qifei Zhu has not received financial support specifically sponsoring this research.
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