Long-Term Corporate Bonds, Credit Ratings, and Carbon Emissions: A Canadian Analysis

Abstract

This study examines whether carbon emissions influence the cost of debt in the Canadian corporate bond market. Using a dataset of approximately 5,800 corporate bonds issued between 2000 and 2025, the analysis explores how issuer-level CO₂ emissions, credit ratings, bond maturity, and industry sector affect bond coupon rates, which serve as a proxy for borrowing costs. The study applies ordinary least squares (OLS) regression and ANOVA techniques to evaluate whether higher-emitting firms face higher financing costs or lower credit ratings.

The results show that traditional financial risk factors, such as credit ratings and bond maturity, are the strongest determinants of coupon rates. Firms with lower credit quality and bonds with longer maturities consistently exhibit higher coupon rates. In contrast, issuer-level carbon emissions have only a marginal, statistically insignificant effect on borrowing costs once conventional financial variables are controlled for.

However, sectoral differences play a significant role. Carbon-intensive industries such as Energy, Industrials, Materials, and Real Estate exhibit significantly higher coupon rates compared to other sectors. This suggests that investors may incorporate environmental risk indirectly through sector-level risk perceptions rather than through firm-specific emissions metrics. When the sector variable is removed from the regression model, the model's explanatory power drops substantially, indicating that industry classification captures a large share of the variation in bond pricing.

These findings indicate that, during the sample period, carbon emissions are not yet systematically priced at the firm level in Canadian bond markets. Instead, environmental risk appears to be reflected primarily through traditional credit assessments and broad sector risk characteristics. This may indicate that climate-related financial risks remain partially mispriced or insufficiently differentiated across companies.

The results have implications for both policymakers and investors. Policymakers may need to strengthen climate disclosure frameworks and develop standardized reporting requirements to enable investors to better evaluate firm-level environmental risks. For investors, the findings highlight the importance of integrating more granular climate metrics, such as emissions intensity, transition strategies, and exposure to carbon pricing, into credit risk analysis. As climate policies and disclosure standards evolve, financial markets may increasingly incorporate firm-level environmental performance into debt pricing.

Overall, the study contributes to the growing literature on sustainable finance by providing evidence that the integration of climate risk into bond pricing remains incomplete, suggesting significant potential for future developments in climate-informed financial markets.