Green Bonds for the Transition to a Low-Carbon Economy

March 8, 2022

The green bond market is emerging as an impactful financing mechanism in climate change mitigation efforts. The effectiveness of the financial market for this transition to a low-carbon economy depends on attracting investors and removing financial market roadblocks.

Authors: Andreas Lichtenberger, Joao Paulo Braga, and Willi Semmler

This paper investigates the differential bond performance of green vs non-green bonds with a dynamic portfolio model that integrates negative as well as positive externality effects and via econometric analyses of aggregate green bond and corporate energy time-series indices; as well as a cross-sectional set of individual bonds issued between 1 January 2017, and 1 October 2020.

The authors find that green bond investment can protect investors and portfolios from oil price and business cycle fluctuations, and stabilize portfolio returns and volatility. Policymakers are encouraged to make use of the financial benefits of green instruments and increase the financial flows towards sustainable economic activities to accelerate a low-carbon transition.



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