📖 Daily Journal | How effectively do green bonds help the environment?

✍🏻️ Author: Mona A. ElBannan, Gunter Löffler

📖 Source: Journal of Banking & Finance, Volume 158, January 2024

Introduction

The article "How effectively do green bonds help the environment?" by Mona A. ElBannan and Gunter Löffler delves into the effectiveness of green bonds in contributing to environmental sustainability, particularly in terms of reducing carbon emissions. The study addresses the problem by examining the relationship between green bond issuance and carbon intensity, aiming to provide insights into the environmental impact of these financial instruments.

Discussion

The study finds that green bond issuance can indeed lead to reductions in carbon emissions, but the effectiveness of this financial tool varies based on the financial characteristics of the issuing firms. Specifically, the authors find that the negative relationship between green bond issue volumes and future carbon intensity is limited to firms with higher financial constraints and higher credit risk. This suggests that green bonds can help firms finance carbon reductions, but a considerable fraction of green bond financing does not lead to measurable benefits for the environment.

The authors also explore the potential direct and indirect effects of green bond financing on environmental outcomes. While the findings are consistent with direct, carbon-reducing effects of projects funded with green bond proceeds, the study cannot establish the existence of such direct effects. The authors note that green bonds can also serve as a signaling or internal commitment device, and issuing large amounts of green bonds can make signaling or commitment more effective. The effects of large issue volumes would then be indirect, generating additional financial or organizational benefits that result in better environmental performance.

Conclusion

The conclusions drawn from the study suggest that green bond issuance can indeed lead to reductions in carbon emissions, particularly for firms facing financial constraints. However, the effectiveness of green bonds in achieving environmental goals varies based on the financial characteristics of the issuing firms. The authors emphasize the importance of screening issuers according to their financial needs, highlighting the potential implications for investors and the future of sustainable finance.

Overall, the article provides valuable insights into the environmental impact of green bonds, offering a nuanced understanding of how these financial instruments can contribute to addressing climate change and promoting sustainability.