The pricing of green bonds

Abstract

Climate change has been for years one of the top priorities of global risk management. Despite the growing recognition of its impacts, addressing this problem has been hindered by a range of political, economic, and social barriers. Green bonds represent one of the most recent and innovative tools to help both public and private sector reach the United Nation’s climate targets. Our study sheds light into the possible existence of greenium in the bond market, additionally providing an empirical study of both green and corporate bond spreads determinants. We also take a closer look at how liquidity may affect both debt instruments. Our results point towards a 7.47 bps (and 8.48 bps if controlling for issuing firms’ credit risk) greenium in the market, given support to the theory that investors would be willing to trade-off financial for environment benefits when investing in green assets. We are also able to verify that both green and brown bonds are differently affected by common pricing variables, such as maturity, number of banks and company rating, among others. Lastly, the present study confirms that green bond spreads are more impacted by an increase in liquidity than their brown counterparts, and that the greenium is effective for investment-grade bonds only.

Date of Award	13 Jul 2023
Original language	English
Awarding Institution	Universidade Católica Portuguesa
Supervisor	João Pinto (Supervisor)