Author(s): Ankit Walia, Anshul Verma and Amol S Dhaigude
This study examines the presence and magnitude of carbon risk premia in the Indian corporate bond market by evaluating credit spreads across firms in polluting and non-polluting industries. Using a comprehensive dataset of corporate bonds issued post-2008, the analysis deploys multivariate regression to assess the influence of carbon exposure alongside issuer- and bond-level characteristics. Results reveal that bonds from carbon-intensive firms carry significantly higher credit spreads, reflecting investor concerns over regulatory risks, future compliance costs, and reputational damage. Interestingly, in polluting industries, larger firms face wider spreads, suggesting that their scale intensifies perceived environmental liabilities. Traditional financial indicators such as leverage and profitability exhibit diminished significance, highlighting a shift in investor focus from classic credit metrics to climate-aligned considerations. Growth in operating income, particularly among polluting firms, is rewarded with tighter spreads, indicating market recognition of potential green transitions. The findings have important implications for investors, regulators, and policymakers: integrating carbon risk into investment decisions is not merely a value-based choice but a financially prudent necessity. The study underscores a paradigm shift in credit risk assessment, where environmental exposures increasingly shape borrowing costs, pushing firms toward transparency and strategic decarbonization.