green bond investment horizon

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To what extent green bond premium differ between short-term and long-term investment horizon

  1. Introduction

In 21st century, climate change has become one of the major concerns for the global community. Its potential effects on precipitation patterns, temperatures, sea levels, and frequency of weather related disasters pose major risks for food, water and other natural resources supplies. In order to deal with climatic change challenge, global stakeholders are embracing both adaptation and mitigation strategies, all while maintaining focus on its economic and social dimensions. Corporations, international institution and organizations, and governmental agencies are coming up with various measures, jointly and independently to address climate change.  For example, in 2008, the World Bank group launched its strategic framework for climate change and development, with an aim of stimulating coordination between private and public sectors in combating climate change. One example of innovations within this framework is World Bank Green Bonds (World Bank, 2015).

Green bonds are relatively new assets, issued with long term goal of addressing climatic change, but their popularity is growing rapidly. By definition, green bonds refers to the conventional bonds with one unique feature: proceeds are earmarked exclusively for those initiatives and projects with environmental benefits, mostly related to adaptation or mitigation of climate change, but also of bio-diversity, resources depletion, and soil, water, or air pollution (Ingelgård & Regnell, 2018). World Bank is the major issuer of green bond to support sustainable projects in developing countries that are mainly affected by climate change. Green bonds serve as vital avenues for low-carbon and climate-resilient investments to support the transition to sustainable economy. European Investment Bank (EIB) issued first socially responsible fixed income investment product in 2007. This investment vehicle adopted “Climate Awareness Bond” structure meant to fund energy efficiency and renewable energy projects (EIB, 2013).  After one year, The World Bank Group issued a bond labeled “green bond” that followed a traditional “plain vanilla” structure. This was the first green bond based on “plain vanilla” bond structure (World Bank, 2015)…………………………………….

  1. Literature Review

This section represents reviews scholarly articles, books, surveys, past studies and other sources that are relevant to the issue of green bonds. The chapter gives a summary, description and critical evaluation of the literature that relates to the problem being investigated. This literature review is designed to evaluate explored sources to show the way which the research fits in the large study filed. The objective of this literature review is to situate assessed articles in the context of their contribution to the development of the entire research, reveal any existing gap in the literature, and to prevent work duplication by identify prior scholarship. The chapter commences by defining conventional bonds and green bonds. Next, the elements of bond premium and the evidences of green bond premium are illustrated in order to link to the following subsector, the market efficiency of the fixed income securities. Finally, the perspective differences between short-term and long-term investors are discussed as well as the conditions for a clientele effect to be priced.

2.1 Definitions of Conventional Bonds and Green Bonds

A bond is a debt financial instrument which holds the right to claim a fixed stream of income periodically and is often called fixed income securities (Bodie, Kane, & Marcus, 2018). Given this bond nature, the price and the yield of a bond can be computed by the pre-determinant cash flows (i.e., coupon payments and principal repayments at par). The genre of the bonds in this study includes both corporate bonds and government bonds, where corporate bonds are categorized into at-maturity, callable, convertible, puttable, perpetual, and floating-rate bonds. The callable bonds give the bond issuers options to extend or retire the bonds at the call date while the puttable bonds give an option right to the bondholders to extend or retire at the put date (Bodie, et al., 2018). Convertible bonds enable the bondholders convert the bonds to common stocks of the firm given the certain conversion ratio (Bodie, et al., 2018). The perpetual bonds are long-lasting bonds with no maturity date but often possess callable features (Jacqueroux, n.d.). These types of corporate bonds provide options to either bond issuers or bondholders and hence can be exploited by the movement of the current market yields. However, regarding a floating-rate bond, its interest payments move with the current market rates.

Following the definition of the regular bond above, a green bond has little difference from the conventional bonds, according to the United Nation Development Program (2019). The only difference between these two bonds is that the proceeds obtained from green bonds are exclusively committed to climate-related or environmental projects (The World Bank, 2015). Notably, any uses of the social-related projects in part or in full is not classified into green bonds but Sustainability Bonds (ICMA, 2018), which are out of scope of this research. Furthermore, green bonds are often suggested to be defined in line with the Green Bond Principles (GBP), which is a voluntary process guideline for issuing green bonds (Bachelet, Becchetti, & Manfredonia, 2019). GBP is issued by International Capital Market Association (ICMA), and provides the disclosure of issuance information on the purpose of improving the transparency and further to capital allocation of green projects (ICMA, 2018)…..

 

 

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