Expect the worse, hope for the best: the valuation of climate risks and opportunities of sovereign bonds
The CCPI data were used to assess
- The climate transition risk of a sovereign (national climate policy sub-score)
- The overall transition performance of a sovereign (Aggregated CCPI score)
Summary:
- Analysis of pricing-in of climate risk exposure and climate performance in sovereign bond yields, differentiated by physical risks, transition risks, and innovation opportunities.
- The results show that financial markets started to take climate performance and climate risk exposure into account, yet to varying degrees.
- Effects differ considerably between countries with higher and lower credit rating, bonds with long- and short term maturities, and the period of analysis.
- Physical risks are shown to be primarily priced-in for countries with lower credit rating, and their bonds at longer-term maturities.
- Transition risks and climate innovation opportunities are of importance to higher-rated sovereigns for bonds with shorter-term maturities.
- These effects are stronger for the period after the Paris Agreement.
- Implications for policy and practice:
- Countries with lower credit rating could reduce their bond yields with climate change adaptation strategies to mitigate climate change physical exposure risks.
- Countries with higher credit rating could reduce their bond yields with a stronger climate policy performance and more climate innovation opportunities.
- Investors and financial market actors should take climate risk exposure and climate performance indicators into account to assess the financial health of a country.
The CCPI data is requested and used for research and science purposes. The CCPI was used as a source in this paper by Julia Bingler:
Expect the worst, hope for the best: The valuation of climate risks and opportunities in sovereign bonds. Bingler, J.A. (2022) CER-ETH Working Paper, 22/371. Available at: https://www.research-collection.ethz.ch/handle