Journal Articles

Ask BERT: How Regulatory Disclosure of Transition and Physical Climate Risks affects the CDS Term Structure
With Julian Kölbel, Markus Leippold and Qian Wang, 2022, Journal of Financial econometrics [download]

We use BERT, an AI-based algorithm for language understanding, to quantify regulatory climate risk disclosures and analyze their impact on the term structure in the credit default swap (CDS) market. Risk disclosures can either increase or decrease CDS spreads, depending on whether the disclosure reveals new risks or reduces uncertainty. Training BERT to differentiate between transition and physical climate risks, we find that disclosing transition risks increases CDS spreads after the Paris Climate Agreement of 2015, while disclosing physical risks decreases the spreads. In addition, we also find that the election of Trump had a negative impact on CDS spreads for firms exposed to transition risk. These impacts are consistent with theoretical predictions and economically and statistically significant.

Additional material:

  • The data used in this paper can be found here

Working papers

Beyond Climate: The Impact of Biodiversity, Water, and Pollution on the CDS Term Structure
With Andreas Hoepner, Johannes Klausmann and Markus Leippold [download]

We investigate the impact of three non-climate environmental criteria: biodiversity, water, and pollution prevention, on infrastructure firms' credit risk term structure from the perspective of double materiality. Our findings show that firms that effectively manage these three environmental risks to which they are materially exposed have up to 93bps better long-term refinancing conditions compared to the worst-performing firms. While the results are less significant for the firm's material impact on the environment, investors still reward the management of these criteria beyond climate with improved long-term financing conditions for infrastructure investments. Overall, we find that financial markets respond positively to the prospect of more stringent regulations related to these criteria, which are currently used by the EU Taxonomy to assess the sustainability of investments.

With Andreas Hoepner, Johannes Klausmann and Markus Leippold [download]