Climate transition risk in sovereign bond markets

Is climate transition risk factored into sovereign bond markets? We find that carbon dioxide emissions, natural resources rents, and renewable energy consumption—as measures of transition risk—significantly affect yields and spreads. Countries with lower carbon emissions incur lower borrowing costs. Advanced countries with reduced earnings from natural resources rents and increased renewable energy consumption are associated with lower borrowing costs, which differ from the effects in developing countries. Given the threat that climate change poses to the global economy and the fast materialization of transition risk, we advocate an increase in the significance of climate transition risk factors as determinants in sovereign bond markets.