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Climate Regulatory Risks and Corporate Bonds

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Abstract

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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  • Lee Seltzer & Laura Starks & Qifei Zhu, 2022. "Climate Regulatory Risks and Corporate Bonds," Staff Reports 1014, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednsr:94093
    Note: Revised January 2024.
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    More about this item

    Keywords

    climate risks; regulatory risk; fixed income;
    All these keywords.

    JEL classification:

    • G00 - Financial Economics - - General - - - General
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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