Media-based climate risks and international corporate bond market

Abstract

We examine the impact of the media-based climate risks, grouped into physical and transition risk categories, on the international corporate bond market in the period from 2012 to 2022. We analyze the following aspects: (i) market development (developed versus emerging markets); (ii) credit quality (investment grade versus high yield bonds), (iii) industry (climate-sensitive versus non-sensitive industries), and (iv) maturity (short versus long term bonds). We find that transition risk is reflected in the global corporate bond market, but not in the emerging corporate bond market segment. Furthermore, transition risk has a material impact only on the investment grade bonds in the global corporate bond market. The industry analysis reveals that there are no consistent significant differences between climate-sensitive and climate-insensitive industries. Maturity analysis indicates that transition risk is reflected in global corporate bond market returns for both short and long terms, but this effect is less pronounced in emerging markets. Physical risk is not systematically reflected in international corporate bond returns. The subsample analysis shows higher importance of transition climate risk following the Paris Agreement in December 2015.