A climate risk hedge? Investigating the exposure of green and non-green corporate bonds to climate risk

Nicola Bartolini, Silvia Romagnoli and Amia Santini

Energy Economics, 2025, vol. 149, issue C

Abstract: We perform an in-depth analysis of climate risk in the corporate bond market, focusing on the green-bond issuers of the three largest European Union economies by GDP: Germany, France, and Italy. We do so by evaluating the impact, on the spreads of their green and non-green bonds, of a number of potential physical risk drivers, selected in line with the ECB climate stress tests and the extant literature, and through the fitting of ARIMAX models. Additionally, we include the log-returns of EU carbon allowances as a potential proxy of transition risk. We find that green and non-green bonds of the same issuer can differ in their exposure to the physical risk variables. Depending on the issuer, green bonds can be equally or less exposed than their non-green counterparts. Additionally, multiple firms in the renewable energy sector have green bonds which provide protection against physical risk. EU carbon allowances are not found to have a consistently significant impact on bond spreads. In line with these findings, we propose an extension of an intensity-based (reduced-form) credit risk model and assess its ability to describe and fit the bond data.

Keywords: Green bonds; Climate risk; Physical risk; Transition risk; Credit risk; Carbon allowances (search for similar items in EconPapers)
JEL-codes: C50 C58 G01 G10 G12 Q50 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:149:y:2025:i:c:s0140988325004918

DOI: 10.1016/j.eneco.2025.108664

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