Do green bonds de-risk investment in low-carbon stocks?

De-risking green investments is crucial to unlocking climate finance and to spurring investors’ interest in allocating resources to activities consistent with a resilient low-carbon economy. We explore the extent to which green bonds could de-risk investments in low-carbon assets by considering different market circumstances. We characterize joint dependence between green bonds and low-carbon assets and consider a de-risking metric based on expected shortfall. Our analysis for the Chinese, European and US markets for 2016 to 2020 indicates that green-bond and low-carbon stock returns move in opposite directions or independently, and a fall in green-bond returns below the 5% quantile increases the expected value of low-carbon stocks by 8.6% and 15.1% in the Chinese and European markets, respectively, but has a negligible effect on the US market. We also document that green bonds have sizeable diversification benefits when they are included in low-carbon investment portfolios.

REBOREDO NOGUEIRA Juan Carlos;  UGOLINI Andrea;  OJEA FERREIRO Javier; 

2022-07-12

ELSEVIER

JRC129959

0264-9993 (online),   

https://www.sciencedirect.com/science/article/pii/S0264999322000116?via%3Dihub,    https://publications.jrc.ec.europa.eu/repository/handle/JRC129959,   

10.1016/j.econmod.2022.105765 (online),