Green Bonds and Carbon Emissions: Exploring the Case for a Rating System at the Firm Level

Abstract

Torsten Ehlers Benoît Mojon Frank Packer torsten.ehlers@bis.org benoit.mojon@bis.org frank.packer@bis.org Green bonds and carbon emissions: exploring the case for a rating system at the firm level1 Green bonds are debt instruments whose proceeds finance projects with various environmental benefits – including climate change mitigation. So far, however, green bond projects have not necessarily translated into comparatively low or falling carbon emissions at the firm level. We discuss the potential benefits of a firm-level rating based on carbon intensity (emissions relative to revenue) to complement existing project-based green labels. We argue that such a rating system could provide a useful signal to investors and encourage firms to reduce their carbon footprint. JEL classification: Q53, G18, G24. rapidly. Financial Interest in green bonds and green finance – commonly defined as the financing of investments that provide environmental benefits (G20 GFSG (2016)) – has been increasing to environmental sustainability have become a priority for many issuers, asset managers and governments alike. In particular, the market for green bonds has been growing fast. Global issuance surpassed $250 billion in 2019 – about 3.5% of total global bond issuance ($7.15 trillion).2 that contribute instruments Private institutions have developed green bond certifications and standards that grant issuers a green label if individual projects are deemed sufficiently in line with the Green Bond …

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