Our analysis finds that climate readiness and vulnerability are significant drivers of bond yields, although they are secondary to credit and technical factors, and this significance has been increasing with time.
The factors are more significant in two sub-populations, ASEAN and Western Europe. However, while some of the relationships between climate factors and bond yields make intuitive sense, others are confounding. For example, we find that emissions are the least important climate factor to bond yields, and that one measure of sovereign emissions is correlated with tighter – not wider – spreads. This suggests that climate transition risk is not yet being priced intuitively by the market.
Link to article at SSRN
