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In Transition to a New Economy Corporate Bonds and Climate Change Risk

In this research, we focus on portfolios of developed-market corporate bonds and study the financial materiality of climate-change risk for these portfolios. Analyzing the level of corporate credit spreads and the slope of credit curves, we show that the broader credit market and bond spreads did not appear to have been significantly and systematically impacted by climate policies or the potential for physical climate risk. But even under a scenario with a modest temperature-rise target (3°C), climate-change risk could negatively affect corporate-bond portfolios and their credit spreads could widen to more than double the current historically narrow levels.

Issuer Spreads Do Not Yet Reflect the Cost of Physical Climate Risk

Issuers’ option-adjusted spreads (OAS) and physical-risk cost of climate change defined as company's expected (Average Scenario) or worst-case (95th percentile, Aggressive Scenario) downside, expressed as a percentage of a company’s total market value, assuming trends in extreme weather conditions continue along different greenhouse-gas concentration pathways, as of June 30, 2021.


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Research Authors

  • Afsaneh Mastouri, Executive Director, MSCI Research
  • Rohit Mendiratta, Vice President, MSCI Research
  • Guido Giese, Executive Director, MSCI Research