Abstract
The green bond market develops rapidly and aims to contribute to climate mitigation and adaptation significantly. Green bonds as any asset are subject to transition climate risk, namely, regulatory risk. This paper investigates the impact of unexpected political events on the risk and returns of green bonds and their correlation with other assets. We apply a traditional and regression-based event study and find that events related to climate change policy impact green bonds indices. Green bonds indices anticipated the 2015 Paris Agreement on climate change as a favorable event, whereas the 2016 US Presidential Election had a significant negative impact. The negative impact of the US withdrawal from the Paris agreement is more prominent for municipal but not corporate green bonds. All three events also have a similar effect on green bonds performance in the long term. The results imply that, despite the benefits of issuing green bonds, there are substantial risks that are difficult to hedge. This additional risk to green bonds might cause a time-varying premium for green bonds found in previous literature.
Highlights
This paper investigates how green bonds are affected by unexpected political events related to climate change
We further find that the 2016 US presidential election (USPE) has a significant negative impact on bonds in general and green bonds in particular
We investigate how unexpected political events related to transitioning countries and economies towards lower carbon emissions affect the green bond market
Summary
This paper investigates how green bonds are affected by unexpected political events related to climate change. Green bonds (GB) were introduced by the European Investment Bank in 2007 as an instrument with a purpose to finance projects with an environmentally friendly profile; see, for example, Horsch and Richter (2017), Zhang et al (2019) and Nguyen et al (2020). A GB is a fixed-income instrument earmarked to raise money in the debt markets for climate and environmentally friendly projects. These bonds are typically asset-linked and backed by the issuing entity’s balance sheet, so they usually carry the same credit rating as their issuers’ other debt obligations. GBs are designated bonds intended to encourage sustainability and to support climate adaptation and mitigation
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