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
April 2022
JEL classification: G38, G24, G00
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.
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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