Sustainable Capital Instruments and Their Role in Prudential Policy: Reverse Green Bonds.
17 Pages Posted: 8 Jul 2019
Date Written: July 4, 2019
In this paper we introduce a new variant on the more traditional green climate bond. Green bonds are standard corporate bonds created to finance environmentally beneficial projects. The concept of a Reverse Green Bond is very similar to contingent convertibles (CoCos) issued by financial institutions since 2009. Reverse Green bonds are hence different compared to the traditional vanilla Green Bonds and offer a higher yield. Investors in this asset class carry the extra risk to miss out on a coupon payment or even forgo the complete face-value of the bond if the issuer misses a pre-agreed climate trigger. For Reverse Green Bonds, such a coupon cancellation would not constitute a default-event. Hitting the climate trigger has also a consequence for the issuer. The skipped coupon or missing face value of the issue will be paid out into a climate fund by the issuer of the Reverse Green Bond. In this paper, we work out a valuation model for these securities and elaborate on their role in prudential policy.
Keywords: green bonds, reverse green bonds, sustainable investing
JEL Classification: Q01, C6
Suggested Citation: Suggested Citation