Bank for International Settlements working paper finds transition risk raises sovereign yields while chronic physical risk is not priced

The Bank for International Settlements published a working paper assessing how climate transition and physical risks are reflected in sovereign bond pricing across 52 advanced economies and emerging market and developing economies over 2000–2023. The analysis finds that transition risk, proxied by carbon dioxide emissions per capita, is associated with higher 10-year sovereign yields, with a more pronounced effect for emerging market and developing economies and for high-emitting countries after the Paris Agreement entered into force at the end of 2015, while temperature anomalies are generally not reflected in sovereign borrowing costs. Using panel regressions and local projections, the paper reports limited average pricing of acute physical risks in reduced-form yield regressions, although countries with high debt levels tend to record higher yields as climate-related disasters increase in frequency and human impact. Medium-term responses vary materially by disaster type and country group, with droughts producing the largest yield increases and emerging market and developing economies showing a more immediate and steeper response across disaster types; effects are larger where fiscal space is more constrained. A simplified risk-premium decomposition finds disaster variables are mostly insignificant once standard macroeconomic factors are netted out, indicating that disaster impacts are largely transmitted through broader macro-fiscal conditions rather than priced as a distinct standalone factor.