Corporate fixed income climate transition risk: Do green bonds help?

Outstanding corporate bonds reached $34 trillion by the end of 2023, and more than $2 trillion of green bonds have been issued over the past five years. Green bonds direct their proceeds to environmental projects. Few investors have tested whether holding one lowers their own transition risk.

Transition risk measured bond by bond

This research covers 79,614 outstanding corporate bonds worth $24.9 trillion, using FactSet data. Each issuer’s financed emissions are calculated under the PCAF standard and compared with a fair-share carbon budget under IPCC and NGFS scenarios. The cost of any overspend is calculated for each year to maturity. Equity absorbs losses first, and the remainder is apportioned across the issuer’s bonds as Transition Value at Risk (TVaR).

More than $1 trillion faces near-total loss under 1.5°C

Under the NGFS Net Zero 2050 scenario, $1.1 trillion of corporate debt faces a TVaR of at least 90% by 2030, about 4% of the market. Electric utilities carry the largest exposure, followed by aerospace and defense, integrated oil, gas distributors and pipelines. Even under current policies, $12 billion of debt from five companies faces at least 90% TVaR, which suggests their business models are exposed to carbon prices already in place.

Green bonds carry their issuer’s risk

The 2,899 green bonds in the dataset total more than $1 trillion. About 18% carry significant transition risk by 2030 under a 1.5°C scenario, with an average debt TVaR of −31%. Electric utilities account for over 70% of that exposure. Transition risk sits with the issuer, so a green bond from a carbon-intensive company carries the same risk as the rest of its debt.

What lowers transition risk for bondholders

Green bonds can fund projects that build long-term resilience. To lower transition risk now, investors need exposure to issuers that are cutting emissions, setting measurable targets and shifting their revenue mix.

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