Climate risk impact on Treasury securities pricing: A global perspective of short-term and long-term period

Abstract

We extend the analysis of the Treasury debt market determinants by empirically investigating the impact of climate change risk on the pricing of Treasury securities across 102 countries around the world. The study takes advantage of a new dataset of climate change proxies that spans over four decades. We distinguish between physical and transition risk, and investigate both short- and long-term securities. We find that, on average, investors react to government commitments for combating climate change and take into consideration the average level of “brownness” of the economy, i.e. the total amount of CO₂ emitted per unit of production. The results also show that concrete government policies aimed at directly combating climate change also matter for sovereign security prices. Overall, countries can borrow at lower costs if they participate in global climate initiatives, enact legislation to favor the transition to green energy, or allocate more of the total budget expenditures to fighting against climate change.