Journal of Financial and Quantitative Analysis Vol. 60 No. 1 2025
Is Carbon Risk Priced in the Cross Section of Corporate Bond Returns?
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.
- DOI
- 10.1017/s0022109023000832
- Volume
- 60
- Issue
- 1
- Pages
- 1-35
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref