Is carbon risk priced in the cross section of corporate bond returns?

Alternative Title

https://doi.org/10.1017/S0022109023000832

Author

Tinghua DUAN
Frank Weikai LI, Singapore Management UniversityFollow
Quan WEN

Publication Type

Journal Article

Version

publishedVersion

Publication Date

6-2023

Abstract

This article examines the pricing of a firm’s carbon risk in the corporate bond market. Contrary to the “carbon risk premium” hypothesis, bonds of more carbon-intensive firms earn significantly lower returns. This effect cannot be explained by a comprehensive list of bond characteristics and exposure to known risk factors. Investigating sources of the low carbon alpha, we find the underperformance of bonds issued by carbon-intensive firms cannot be fully explained by divestment from institutional investors. Instead, our evidence is most consistent with investor underreaction to the predictability of carbon intensity for firm cash-flow news, creditworthiness, and environmental incidents.

Keywords

Climate change, Carbon emissions, Corporate bond returns, ESG investing

Discipline

Corporate Finance | Environmental Sciences | Finance and Financial Management | Portfolio and Security Analysis

Research Areas

Finance

Publication

Journal of Financial and Quantitative Analysis

ISSN

0022-1090

Identifier

10.1017/S0022109023000832

Publisher

Cambridge University Press

Citation

DUAN, Tinghua; LI, Frank Weikai; and WEN, Quan. Is carbon risk priced in the cross section of corporate bond returns?. (2023). Journal of Financial and Quantitative Analysis.
Available at: https://ink.library.smu.edu.sg/lkcsb_research/7367

Copyright Owner and License

Authors

Creative Commons License

This work is licensed under a Creative Commons Attribution 3.0 License.