The Optimal Design of Green Securities

59 Pages Posted: 19 Jul 2022 Last revised: 6 Oct 2023

Date Written: June 14, 2022


We develop a model of green project financing which incorporates investors with green preferences into an otherwise standard framework of corporate financing with asymmetric information. Firms seek to finance green projects whose outcomes embed an uncertain component that is revealed only to the firm and which can be manipulated. Firms can raise funds using non-contingent debt contracts, such as green bonds, that specify ex-ante the projects to be financed using the proceeds, but make no commitment to green outcomes. Alternatively, they can use outcome-based contingent contracts, such as sustainability-linked bonds, that do not impose restrictions on the use of proceeds but embed contingencies which incentivize commitment to outcomes. We demonstrate that the co-existence of the two green debt contracts is an equilibrium result when reported green outcomes are manipulable and firm types differ in their ability to manipulate. In the presence of asymmetric information about firms’ abilities to manipulate vs exert costly action, contingent debt is issued by low-type firms which seek to profit from manipulation, whereas non-contingent debt can be used as a costly signaling device. We provide empirical evidence consistent with these predictions.

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 Securities (June 14, 2022). Available at SSRN: or

Adelina Barbalau (Contact Author)

University of Alberta ( email )

Edmonton, Alberta T6G 2R3

Federica Zeni

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

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