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Climate transition risk and corporate bond pricing

Author

Listed:
  • Dong, Yizhe
  • Liu, Yaorong
  • Wang, Tianju
  • Zhang, Longyao

Abstract

This study investigates the impact of climate transition risk on corporate bond spreads. Utilizing a novel transition risk proxy derived from the carbon gap, we analyze a sample of Chinese corporate bonds from 2008 to 2023. Our findings confirm that bond investors incorporate transition risks into pricing, consistent with the carbon premium hypothesis. We identify heightened credit and distress risks as the primary channels through which transition risk influences bond spreads. Furthermore, the transition risk premium is more pronounced among issuers with lower transparency, state-owned enterprises, and those in regions undergoing political turnovers. Additional analysis reveals that environmental policies and technological innovations are key drivers of the transition risk premium. The influence of transition risk also extends to non-pricing bond terms, such as maturity and covenants, with a more significant premium observed in green bonds.

Suggested Citation

  • Dong, Yizhe & Liu, Yaorong & Wang, Tianju & Zhang, Longyao, 2026. "Climate transition risk and corporate bond pricing," Emerging Markets Review, Elsevier, vol. 73(C).
    • Handle: RePEc:eee:ememar:v:73:y:2026:i:c:s1566014126000579
    DOI: 10.1016/j.ememar.2026.101493
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