Authors: Lee Seltzer, Laura T. Starks, and Qifei Zhu
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Staff Reports
Climate Regulatory Risks and Corporate Bonds
Number 1014
April 2022 Revised March 2025
April 2022 Revised March 2025
JEL classification: G38, G24, G00
Concerns about climate risk suggest it should affect risk assessment and pricing of corporate securities, particularly for firms facing potential regulatory restrictions. Employing a shock to expected climate regulations, we find support for this hypothesis given our evidence that climate regulatory risks causally affect bond credit ratings and yield spreads. Moreover, a structural credit model indicates the increased spreads for high carbon issuers, especially those located in stricter regulatory environments, derive from changes in firms' asset volatilities rather than asset values, highlighting that regulatory uncertainty affects security pricing. The results have important implications for corporate decisions, portfolio management, and policymaking.
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 https://www.newyorkfed.org/research/staff_reports/index.html.
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.
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 https://www.newyorkfed.org/research/staff_reports/index.html.
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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