Arguably, this risk should be reflected in the pricing of oil & gas majors’ bonds. In this note, we use existing datasets to seek to understand how climate risk can be a driver of funding costs.
This analysis finds that when considering the whole universe of liquid derivative underlyings, climate performance seems to be a partial driver for funding spreads. Yet when looking in more detail at bond curves, we find that the fixed income market does not fully incorporate climate risk in its pricing of oil & gas debt. In long-end curves, there seems to be little differentiation between oil & gas credits depending on future production intentions.
Data indicates that investors are not being paid for the additional risk of investing in poorer environmental performers in this sector. We suggest that investors should evaluate climate risk in their portfolio, and transition into stronger performers, while spreads are flat.