Green bonds – certification, shades of green and environmental risks

Abstract

torsten ehlers frank packer torsten.ehlers@bis.org frank.packer@bis.org green bond finance and certification1 financing of investments through green bonds has grown rapidly in recent years. but definitions of what makes a bond “green” vary. various certification mechanisms have evolved to allow more granularity as well as continuity in assessment. green bonds have been priced at issuance at a premium on average relative to conventional bonds, but their performance in the secondary market over time has been similar. a relatively large share of green bonds are in sectors subject to environmentally related credit risks. more consistent green bond standards across jurisdictions could help to further develop the market. jel classification: g24, o16, q50. income securities which finance investments with green bonds are fixed environmental or climate-related benefits. green bonds are an integral component of “green finance” more generally, which aims to “internalize environmental externalities and adjust risk perceptions” for the sake of increasing environmentally friendly investments (g20 gfsg (2016)). economic theory teaches that a first-best solution for closing the gap between the private and social costs of pollution would be a mix of lump sum taxes and subsidies, with regulations to impose implicit prices following closely behind. green finance can also help to alleviate these externalities, through market-based means. it acts by increasing the flow of funds to …

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