Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/297339 
Year of Publication: 
2024
Series/Report no.: 
ECB Working Paper No. 2899
Publisher: 
European Central Bank (ECB), Frankfurt a. M.
Abstract: 
The European Union plays a prominent role in climate regulations initiatives, this commitment likely implies that climate risk premiums look different in Europe compared to the rest of the world. This paper examines the pricing implications of climate risks in euro area corporate bond markets, focusing on physical and transition risk. Using climate news as a gauge for systematic climate risk, we find a significant pricing effect of physical risk in long-term bonds, with investors demanding higher returns on bonds exposed to physical risk shocks. The estimated physical risk premium is 34 basis points, indicating increased awareness and hedging demand after the Paris Agreement. Transition risk premiums are smaller and less significant, reflecting the ongoing transition to a low-carbon economy. Our findings contribute to understanding climate risk pricing in the European bond markets, highlighting the importance of physical risk and the evolving nature of investor demand for climate-resilient assets.
Subjects: 
Climate physical risk
climate transition risk
corporate bonds
news index
intertemporal hedging demand
JEL: 
G12
G14
G28
Q51
Q54
Persistent Identifier of the first edition: 
ISBN: 
978-92-899-6379-4
Document Type: 
Working Paper

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