Climate Regulatory Risks and Corporate Bonds

Climate Change News Risk and Corporate Bond Returns

“…EGKLS show that a firm's environmental performance is useful in constructing strategies to hedge against climate change news risk. Seltzer et al (2020) find that, in states with high environmental enforcement rates, firms with a lower ESCORE have lower credit ratings and higher yields. Other studies documenting the effect of ESG factors on firm values include those of Heinkel, Kraus, and Zechner (2001), Krüger (2015), Ferrell, Liang, andRenneboog (2016), Lins, Servaes, andTamayo (2017), and Albuquerque, Koskinen, and Zhang (2019).…”

“…Our study contributes to the contemporary climate finance literature that examines the effect of climate change risk on financial markets and firms. Seltzer, Starks, and Zhu (2020) find that bond yields and credit ratings are jointly determined by the firm's environmental profile and its regulatory risk exposure. Ilhan, Sautner, and Vilkov (2021) find that uncertainty about climate policy is priced in the option market.…”

Asian Development Outlook 2021: Financing a Green and Inclusive Recovery

“…Using the Paris Agreement as an impending regulation change in climate-related risk, Seltzer, Starks, and Zhu (2020) found a causal relationship between regulatory change and risk assessment, which influences the financing costs borne by issuers of corporate bonds. After the passage of the Paris Agreement, newly regulation-sensitive issuers suffered downgraded credit ratings and widening yield spreads relative to bonds issued by firms without environmental concerns.…”

“…Cost of equity (Hong and Kacperczyk 2009;Chava 2014;Riedl and Smeets 2017;Gibson and Krueger 2018;Ramelli, Ossola, and Rancan 2020;Hsu, Li, and Tsou 2020;Seltzer, Starks, and Zhu 2020). This means that firms with high carbon emissions have a smaller investor base and hence less investor recognition.…”

“…From the supply side, public and private financing entities can signal their commitment to the Sustainable Development Goals by tapping green and social finance, thereby attracting positive investor recognition and broadening their investor base (Ghoul et al 2011;Chava 2014). The literature shows that firms beset by environmental issues have less diversified investor bases and pay higher costs for capital (Seltzer, Starks, and Zhu 2020;Painter 2020;Battiston and Monasterolo 2020;de Greiff, Delis, and Ongena 2018;Ng and Rezaee 2015;Beirne, Renzhi, and Volz 2020). By contrast, firms that tap green and social finance can signal to investors their awareness of positive green and social outcomes and their commitment to achieving them.…”