Abstract
Using data on institutional investors' bond holdings, we investigate the resilience of green bonds to the COVID-19 shock in a difference-in-differences framework. We find that during the COVID outbreak green bonds experience lower sales, on average, while in normal times no significant differences emerge compared with ordinary bonds. The result is robust across different investor classes and is not driven by those that have a longer-term investment horizon. Furthermore, we find that sustainability-oriented funds sell less of green bonds than their peers without a sustainability mandate. We also document that the ownership of green fixed income securities is more concentrated than that of comparable conventional bonds, and that concentration has increased in the first quarter of 2020.
Highlights
Using data on bond holdings by institutional investors and a difference-in-differences setup, in this paper we explore the resilience of sustainable debt instruments during the period of market turmoil due to the COVID-19 pandemic
We find that green bond ownership is more concentrated than that of conventional bonds in normal times, and that concentration appears to have increased during the COVID outbreak
While the range of sustainable debt instruments is rapidly expanding and diversifying, there is practically no evidence on the performance of these new asset classes in periods of market stress, and on the role played by institutional investors as market makers
Summary
Capital markets plays an increasingly important role in scaling up the financing of investments that provide environmental and social benefits. The sustainable bond market is rapidly expanding and diversifying, with innovative instruments developed to meet growing investor demand and ramping up corporate commitments towards tackling environmental and social challenges While these novel asset classes provide attractive investment opportunities, the associated financial risks are largely unexplored. Using data on bond holdings by institutional investors and a difference-in-differences setup, in this paper we explore the resilience of sustainable debt instruments during the period of market turmoil due to the COVID-19 pandemic. Having already emerged as the ‘star of climate finance’ in the recent years, green bonds are becoming increasingly popular as companies need to fund operations that are more environmentally friendly and policymakers seek a sustainable recovery from the coronavirus crisis Further momentum for this asset class is expected from the political agenda, at European level.
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