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Is Carbon Risk Priced in the Cross Section of Corporate Bond Returns?

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  • Duan, Tinghua
  • Li, Frank Weikai
  • Wen, Quan

Abstract

This article examines the pricing of a firm’s carbon risk in the corporate bond market. Contrary to the “carbon risk premium” hypothesis, bonds of more carbon-intensive firms earn significantly lower returns. This effect cannot be explained by a comprehensive list of bond characteristics and exposure to known risk factors. Investigating sources of the low carbon alpha, we find the underperformance of bonds issued by carbon-intensive firms cannot be fully explained by divestment from institutional investors. Instead, our evidence is most consistent with investor underreaction to the predictability of carbon intensity for firm cash-flow news, creditworthiness, and environmental incidents.

Suggested Citation

  • Duan, Tinghua & Li, Frank Weikai & Wen, Quan, 2025. "Is Carbon Risk Priced in the Cross Section of Corporate Bond Returns?," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 60(1), pages 1-35, February.
    • Handle: RePEc:cup:jfinqa:v:60:y:2025:i:1:p:1-35_1
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