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

• Main Authors: DUAN, Tinghua, LI, Frank Weikai, WEN, Quan
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2023
• Subjects: Climate change; Carbon emissions; Corporate bond returns; ESG investing; Corporate Finance; Environmental Sciences; Finance and Financial Management; Portfolio and Security Analysis
• Online Access: https://ink.library.smu.edu.sg/lkcsb_research/7367; https://ink.library.smu.edu.sg/context/lkcsb_research/article/8366/viewcontent/is_carbon_risk_priced_in_the_cross_section_of_corporate_bond_returns_pvoa_cc_by.pdf
• Institution: Singapore Management University

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.