Funding the Fittest? Pricing of Climate Transition Risk in the Corporate Bond Market

We study whether climate transition risk is priced in corporate bond markets. We assess whether corporate bond investors value companies’ efforts to mitigate climate change by innovating in the green space. By combining global firm-level data on greenhouse emissions and green patents with bond-level holdings data, we provide evidence of a positive transition risk premium, which is significantly lower for emission intensive companies that engage in green innovation. The joint effect of emission intensity and green innovation on bond yield spreads is driven by European investors, specifically institutional investors. Overall, our results indicate that investors care about whether companies are ‘fit’ for the green transition.

Keywords: Climate Change; Climate Transition Risk; Carbon Premium; Greenium; Green Innovation; Green Patents; Institutional Investors; Institutional Ownership
JEL codes G12; G15; G23; Q51; Q54;

Working paper no. 797