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Expect the worst, hope for the best: The valuation of climate risks and opportunities in sovereign bonds

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  • Julia Anna Bingler

    (Center of Economic Research (CER-ETH), ETH Zürich, Zürichbergstrasse 18, 8032 Zürich, Switzerland)

Abstract

How climate aspects affect sovereign bonds is still a new field of research. I differentiate between transition, physical, and innovation aspects of climate risks and climate performance and estimate the pricing-in of these climate aspects in sovereign bond yields for a sample of 29 countries, for the time 2008-2021. The results show that the effects differ between countries with higher and lower credit rating, long- and short term maturities, and the periods of analysis. Financial markets seem to expect the worst with regards to physical risk exposure and impacts, which are associated with higher yields for the lower-rated countries’ bonds at longer-term maturities. In contrast, they seem to hope for the best with regards to transition risk exposure and innovation opportunities, which are associated with lower bond yields for the countries with higher credit rating, mainly for bonds at shorter-term maturity. The effects are more pronounced for the period after the Paris Agreement and might gain increasing importance as physical and transition risks aggravate in the future.

Suggested Citation

  • Julia Anna Bingler, 2022. "Expect the worst, hope for the best: The valuation of climate risks and opportunities in sovereign bonds," CER-ETH Economics working paper series 22/371, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.
    • Handle: RePEc:eth:wpswif:22-371
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    References listed on IDEAS

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    Cited by:

    1. Gong Cheng & Eric Jondeau & Benoit Mojon, 2022. "Building portfolios of sovereign securities with decreasing carbon footprints," BIS Working Papers 1038, Bank for International Settlements.

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    More about this item

    Keywords

    sovereign bonds yields; climate physical risks; climate transition risks; climate opportunities; LASSO dimensionality reduction;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q55 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Technological Innovation

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