Ask BERT: How Regulatory Disclosure of Transition and Physical Climate Risks Affects the CDS Term Structure

Abstract 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 credit default swap (CDS) market. Risk can either increase or decrease CDS spreads, depending whether disclosure reveals new risks reduces uncertainty. Training BERT differentiate between transition physical risks, we find that disclosing increases spreads after Paris Climate Agreement of 2015, while decreases spreads. In addition, also election Trump had a negative firms exposed risk. These impacts are consistent with theoretical predictions economically statistically significant.