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2023 | OriginalPaper | Chapter

The Global Green Bond Market

Authors : Danilo Liberati, Giuseppe Marinelli

Published in: Financial Risk Management and Climate Change Risk

Publisher: Springer Nature Switzerland

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Abstract

This chapter presents a comprehensive study of the ESG bond market, which has experienced a strong growth in the last few years and is about to get an additional boost from the forthcoming implementation of the next-generation plan of the European Union. We use a security-level data set comprising a large sample of ESG bonds exchanged on the main global financial markets, integrated with microdata employed in official statistics, such as financial accounts and security holdings. First, we describe the most salient features of the global supply of ESG bonds by analyzing issuers’ and securities’ characteristics, the differences across countries, and sectors and their evolution over time. Second, we shed light on Italian residents’ holdings of ESG bonds by Italian residents, with a focus on sectoral holdings within the context of the financial account statistics. Finally, we briefly discuss the greenium puzzle, i.e. the negative yield difference between ESG bonds and their standard counterparts.

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previous chapter Machine Learning, ESG Indicators, and Sustainable Investment

next chapter The Exposure of Investments to Climate and Environmental Risks

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See the 2015 Paris Agreement and the 2030 Sustainable Development Agenda.

See Yoshino et al. (2019).

Hafner et al. (2020) claims that investors’ reluctance regarding green investments depends on several factors: lack of confidence given the technology risks; lack of information and experience; unstable energy policies; and high transition and commercialization costs.

We will be using ‘ESG bonds’ and ‘ESG debt securities’ interchangeably throughout the chapter when referring to the whole set of debt securities with the ESG label and belonging to the commonly known sustainable market. Indeed, green bonds represent 85 per cent of our ESG dataset; in a few cases, we find a misclassification between sources for the same security, in particular for green and sustainable securities.

See https://sseinitiative.org and https://www.climatebonds.net

The greenwashing phenomenon may arise when the communication of firms to enhance their environmental reputation is not supported by data and results, or it is consciously used to distract investors from the true profile of the company.

The expression greenium is usually referred to green bonds, but for the sake of brevity we will be using it for the entire set of ESG bonds.

See also the recent remarks by Bank of Italy Governor at the ‘Financing Carbon Neutrality’ Round Table of the annual conference of the Boao Forum for Asia and the presentation of theG20 TechSprint 2021 on sustainable finance.

See the MEF Press Release.

See also ECB (2020) (Box 7) for an overview of the performance and resilience of the euro-denominated ESG funds and green bonds.

See Faiella and Malvolti (2020) for an assessment of the climate risk for Italian finance.

For surveys on this topic see Liaw (2020) and Cheong and Choi (2020).

Ehlers and Packer (2017) point out that issuing green bonds is a costly transaction due to the requirement of third-party validation to reduce informational asymmetry and the risk of greenwashing (Baker et al. 2018). Hyun et al. (2020) examine the green bond market investors’ pricing, by finding that green bonds have lower yields than the conventional ones.

For more details see the summary of Green/Social/Sustainable Bonds Databases.

Evaluation steps and methodologies to label a bond as ‘green’ may change. Generally, on a voluntary basis ESG issuers try to design their ESG framework/bonds to respect the most important criteria and guidelines such as the Green, Social and Sustainability-Linked Bonds Principles (https://www.icmagroup.org/sustainable-finance/), the Climate Bonds Standard (https://www.climatebonds.net/market/best-practice-guidelines), or the recent release of the EU Green Bond Standard. Validation provided by independent external reviewers can be distinguished in different types of services (Second Party Opinion, Verification, Certification, or Bond Scoring/Rating) based on the tightness, timing (before or after the issuance) and focus of the evaluation. For more details see Ehlers and Packer (2017) and the Guideline for the external reviewers published by the ICMA.

In some cases, ISIN codes are not available. In particular, for US and Canadian securities we employ the CUSIP codes—identifiers used in North America—and convert them into ISIN codes by using the Luhn algorithm specified in ISO/IEC 7812-1.

See the Appendix.

The platform Cbonds is a tool for global bond market screening. It provides detailed information on securities from 180 countries (100 per cent coverage of Eurobonds worldwide) and attaches the ‘green bond’ label where applicable. In the presence of US municipalities a useful instrument to obtain the securities’ identifiers and to control for the multi-tranche cases is the Electronic Municipal Market Access (EMMA) Dataport, from where all official statements of issues by US municipalities can be downloaded.

The observational unit is the banking group or the stand-alone bank if not affiliated to any banking group. For the sake of brevity, we will be using the term ‘bank’ to indicate the above-mentioned observational unit.

The ‘climate awareness bond’, issued by the European Investment Bank (EIB) in 2007, is generally considered as the first green bond. Tang and Zhang (2020) and Lebelle et al. (2020), among others, show that the sustainable instruments market became significant only after 2013, due to the increase of issues by commercial banks and corporations and the publication of the Green Bond Principles by ICMA.

The China Green Bond Index provided by the Luxembourg Stock Exchange includes bonds which are compliant with different green bond principles. The minimum share of the proceeds to be used in green projects to distinguish a security as ‘green’ ranges between 50 per cent (in the case of the People’s Bank of China—PBOC—Green Bond Endorsed Project Catalogue and the National Development and Reform Commission—NDRC—Green Bond Guidelines) and 95 per cent (in the case of CBI Climate Bonds Standards). This explains the higher coverage of our sample for Chinese bonds over those reported on the CBI platform. For more details on the differences between international and domestic standards see also Clifford Chance (2020).

In August 2019, a French State-owned company issued the world’s first ever 100-year green bond.

For more details, see Bank of Italy (2021).

The European Union, the European Investment Bank (EIB), and the World Bank (WB).

Securities with a BBB- or higher rating are considered as investment grade.

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Title: The Global Green Bond Market
Authors: Danilo Liberati
Giuseppe Marinelli
Publisher: Springer Nature Switzerland
Book: Financial Risk Management and Climate Change Risk
Print ISBN: 978-3-031-33881-6

Electronic ISBN: 978-3-031-33882-3

Copyright Year: 2023
DOI: https://doi.org/10.1007/978-3-031-33882-3_11