SuSo Small Grant allocated to study 'Why are Green Bonds Issuers Climate Friendly?'

In February 2020 dr. Swarnodeep Homroy received a SuSo Small Grant for a primary and secondary data collection on Green Bonds - a financial instrument that takes loans which will be used to finance green projects. His findings are now ready for publishing.

Nowadays there is a lot of focus on how and why companies should be more responsible in their environmental impact. The challenge of transitioning to a carbon-neutral system requires ingenious financial innovation. Historically, all big stories of innovations are essentially stories of financing. The lightbulb could only be created because Edison was allowed to sell shares of his company to the public. Similarly, today’s companies need to raise money for becoming more climate sensitive and responsible for the environment. But how do companies raise money for green technology?

One of the popular modes of capital raising has been through the issuance of Green Bonds where the money raised is reserved to be spent only in green technology. What has become clear over the years is that companies that issue green bonds have lower carbon emissions. The question is: is it because only low-emission firms issue green bonds in the first place? Homroy’s study (with Asad Rauf from the UG and Julia Reynolds from the SEC) explores the incentive structures in the investment ecosystem of green bonds. He looks into the channels through which green bond issuers have lower carbon emissions. He shows that companies that issue green bonds have better oversight of climate impacts, a better incentive structure for managers, and a more climate-focused corporate governance. The findings will inform policy makers about the incentives that drives the decisions of agents in the life-cycle of green bonds. Understanding these incentives become important to design regulatory standards around reviewing and auditing green bond issuances.