The Next Step in Green Bond Financing

37 Pages Posted: 5 Jun 2019 Last revised: 20 Mar 2020

See all articles by Dion Bongaerts

Dion Bongaerts

Erasmus University Rotterdam (EUR) - Finance

Dirk Schoenmaker

Rotterdam School of Management, Erasmus University; Erasmus Research Institute of Management (ERIM); Centre for Economic Policy Research (CEPR)

Date Written: May 17, 2019

Abstract

In recent years, green bonds have gained popularity as the investment industry is looking for environmentally friendly instruments. Yet, green bonds fragment bond issues, which reduces liquidity and thereby increases financing costs. Moreover, most green bonds are used to refinance existing activities. As a result, the growth in environmentally-friendly initiatives is limited. Finally, the product and market design of green bonds is such that prices are unlikely to reflect environmental performance accurately. This makes it hard for investors to differentiate among green bonds and allows firms to get away with window-dressing (greenwashing). We propose to split green bonds into regular bonds and green certificates. We show that this design 1. makes market prices more informative about environmental performance, 2. leads to more liquid securities and therefore lower financing costs, and 3. provides incentives to start new environmentally friendly projects rather than refinance existing ones.

Keywords: security design, liquidity

JEL Classification: G10, G12, Q41

Suggested Citation

Bongaerts, Dion and Schoenmaker, Dirk, The Next Step in Green Bond Financing (May 17, 2019). Available at SSRN: https://ssrn.com/abstract=3389762 or http://dx.doi.org/10.2139/ssrn.3389762

Dion Bongaerts (Contact Author)

Erasmus University Rotterdam (EUR) - Finance ( email )

Burgemeester Oudlaan 50
Rotterdam, 3062PA
Netherlands
+31 (0) 10 40 82 790 (Phone)
+31 (0) 10 40 89 017 (Fax)

HOME PAGE: http://www.rsm.nl/portal/page/portal/home/faculty/academic_departments/finance/faculty_and_staff/fac

Dirk Schoenmaker

Rotterdam School of Management, Erasmus University ( email )

P.O. Box 1738
Room T08-21
3000 DR Rotterdam
Netherlands

HOME PAGE: http://www.rsm.nl/people/dirk-schoenmaker/

Erasmus Research Institute of Management (ERIM) ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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