Investors in green bonds and financial resilience.

Our project aims to provide empirical evidence about portfolios and resilience of investors involved in green assets. The popularity of green bonds is at a record high, amid demand for investments addressing climate risks and social inequality. Yet we know little about who invests in these bonds. Understanding investors in green bonds is important, not only to price them and predict their performance but also to understand their potential role in a financial crisis. The core of our research is on the portfolios’ structures and trading patterns of green bond investors. Since this is an unexplored research area, we will start by characterizing the ownership structure of green bonds. We will document the trends in green bond issuances and compare them to the remaining market. We will also study the distress risk and changes in holdings made by green bond investors following negative market events. For the small sample of green bonds that entered the distress, we aim to provide initial estimates of the probability, duration, and outcomes of distress events. Finally, we will assess the sustainability footprint of green bonds relative to the rest of their investors’ portfolios. By so doing, the project will answer whether green bonds in portfolios are token investments or revelations of true preferences for sustainability. We will conclude with a comparison of the sustainability and financial performance of green bonds and their investors. This is the first time we can empirically study the resilience of green bonds thanks to the unique data about bond ownership. Environmental policy is one of the key areas where government intervention in private business has always been advocated. Our project will support such regulatory decisions by documenting who currently owns green bonds and how these investors behave in distress. This information will help regulators to assess the impact of potential ownership policies on the demand for sustainable assets as well as their resilience to financial distress.

Our project studies investors in Scandinavian green bonds. While green bonds have become increasingly popular over recent years, we know little about who invests in them. Understanding their investors is important, not only to price them and predict their performance, but also to understand their potential role for systemic risk in a financial crisis. Furthermore, many regulators would like to encourage investment into more sustainable assets to improve long-term living conditions. But optimal policy (e.g., regulating duties of institutional investors, or tax advantages for certain green assets) needs to be informed about their effects on potential investors. The core of our research is on distress risk and resilience of green bond investors. Arguably, the risk of distress and potential restructuring outcomes are the most important bond-specific drivers for fixed income performance. For regulators, understanding any systemic risk evolving from green bonds is key to inform policy. However, the theory is not sufficient to guide us on this question. Interest in green bonds could be a signal for a long-term investment horizon and imply higher resilience in downturns. Indeed, Starks, Venkat, and Zhu (2018) show that longer-term investors hold more shares in firms with higher ESG ratings. But that patience may not hold ex-post when general market illiquidity means that capital may be needed and/or rewarded more in traditional investments. It is therefore an empirical question how investors in green bonds behave in distress and during restructuring. Our project will use detailed Norwegian data on bond ownership and trading to fill these gaps in the literature. To be more precise, we will document the role of green bonds in their investors’ portfolios, with a focus on their resilience. How do green bonds compare to the rest of their investors’ portfolio in terms of weights, performance, risk, and sustainability outcomes? How resilient are these investors in distress?