Green bonds issuers pay a higher premium compared to brown bond issuers at the same level of risk, ­­a new study by Paris School of Economics shows (Karpf and Mandel 2017). This difference in premia suggests there may still be a reluctance of institutional investors towards green investments.

The markets for climate finance have long seemed plagued by inefficiencies. On the one hand, actors in the field generally put forward the lack of adequate funding as one of the key barrier to the implementation of climate mitigation projects. On the other hand, financial institutions emphasize the lack of an appropriate framework for green oriented investments despite the existence of a potentially large demand. Against this background, the rise of green-bonds, whose volume has grown to $160 billion between 2008 and 2016, is emphasized as a major success and suggests that the markets might have eventually found a way to channel the large stock of capital demanding climate friendly investments.

As far as their financial structure is concerned, green bonds are perfectly identical to standard bonds. They are labelled as green because the issuer pledges to use the proceeds of the bonds in accordance with some sustainable development standards in areas of environmental concern such as climate change, natural resources depletion, loss of biodiversity and/or pollution control”.Since the first issuance by the European Investment Bank and the World Bank, green bonds have been emitted by a wide range of entities: corporations, municipalities, governments, international organisations. Their volume is relatively large: $70 billion were issued in 2016 and $50 to $100 billion additional emissions are expected for 2017.

Hence, green bonds have became a mainstream financial instrument. As their financial properties are identical, they shall attract the same demand as ‘standard/brown” bonds from non-environmentally concerned investors. Further, they shall attract a specific demand from investors concerned with environmental sustainability. All together, a green bond shall be more demanded than its brown counterpart. Therefore it shall trade at a higher price and yield a lower interest rate. Hence, environmentally sustainable projects shall benefit from better financing conditions and pass more easily the rentability threshold. In turn, entrepreneurs should be attracted and growth stimulated in the corresponding sectors. From a systemic perspective, green bonds shall provide means for individuals to influence the direction of economic growth through the allocation of their savings.

In a recent paper (Karpf and Mandel 2017), we use big data to test these assumptions. We have analyzed 2 million transactions on the US municipal bonds to compare the yield of green and brown bonds with similar characteristics. By comparing their yield curves (figure above), we find that green bonds in average pay a lower interest rate and hence provide better financing conditions than brown bonds. However, a quantitative analysis shows that this spread can be completely explained by the characteristics of the issuer, irrespectively of the green nature of the bond. In fact, the characteristics of green-bond emitters alone should yield a higher premium than the one actually observed. Hence, far from benefitting from a comparative advantage, green bonds are actually penalized by the market: emitters have to pay a premium for labelling their bonds as “green”.

Spot price as a function of maturity in green and brown bonds. From Karpf and Mandel (2017)

An hypothetic explanation of this puzzle is that institutional investors have became very averse to innovation, to the extent that the mere labelling of an asset as green makes them suspicious




The SIMPOL Project is currently funded by the H2020 European grant DOLFINS (no. 640772) in the Global Systems Science area of the Future Emerging Technologies program.