The Optimal Design of Green Debt

69 Pages Posted: 19 Jul 2022 Last revised: 10 Jan 2025

See all articles by Adelina Barbalau

Adelina Barbalau

University of Alberta

Federica Zeni

Swiss Finance Institute; École Polytechnique Fédérale de Lausanne (EPFL)

Date Written: June 14, 2022

Abstract

We develop a theory of optimal security design for financing green investments in the presence of greenwashing. Green outcomes are uncertain and can be obtained through the implementation of tangible projects and/or intangible effort-based strategies. When manipulation is not possible, the optimal contract takes the form of an outcome-based security design, similar to a sustainability-linked bond (SLB), with a payoff that is contingent on green outcomes. When manipulation is costless, the optimal contract takes the form of a project-based security design, similar to a green bond (GB), with a payoff that depends on the implementation of green projects. When green outcomes can be manipulated at some cost, the optimal contract is a hybrid which incorporates both an outcome-contingency (like an SLBs) and a project-contingency (like a GB). The model rationalizes several empirical facts. 

Keywords: Security Design, Corporate Debt, Green Bonds, Sustainability-Linked Bonds, Carbon Emissions

JEL Classification: G23, G32, D62, Q56

Suggested Citation

Barbalau, Adelina and Zeni, Federica, The Optimal Design of Green Debt (June 14, 2022). Available at SSRN: https://ssrn.com/abstract=4155721 or http://dx.doi.org/10.2139/ssrn.4155721

Adelina Barbalau (Contact Author)

University of Alberta ( email )

Edmonton, Alberta T6G 2R3
Canada

Federica Zeni

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

École Polytechnique Fédérale de Lausanne (EPFL) ( email )

Quartier UNIL-Dorigny, Bâtiment Extranef, # 211
40, Bd du Pont-d'Arve
CH-1015 Lausanne, CH-6900
Switzerland

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
1,185
Abstract Views
3,342
Rank
39,057
PlumX Metrics