George Serafeim is Professor of Business Administration at Harvard Business School. This post is based on a recent paper authored by Professor Serafeim; Malcolm Baker, Professor of Finance at Harvard Business School; Daniel Bergstresser, Associate Professor of Finance in the Brandeis International Business School; and Jeffrey Wurgler, Professor of Finance at New York University.
Climate change is accelerating. Since recordkeeping began in 1880, the six warmest years on record for the planet have all occurred since 2010. One estimate suggests that keeping the world below the 2-degree Celsius scenario, a threshold viewed as limiting the likelihood of devastating consequences, will require $12 trillion over the next 25 years.
In the absence of a global carbon pricing scheme, bond markets will be central to financing these interventions. In this paper, we study the U.S. market for “green bonds,” which we and others define as bonds whose proceeds are used for an environmentally friendly purpose. Examples include renewable energy, clean transportation, sustainable agriculture and forestry, energy efficiency, and biodiversity conservation. Since the first green bond was issued in 2007 by the European Investment Bank (EIB), the market has expanded to include a variety of issuers, including supranationals, sovereigns, corporations, and U.S. and international municipalities. It is a small but increasingly well-defined area of the fixed income markets. Yet in spite of the general acceptance of the notion of a “green” bond, there is not yet a single universally-recognized system for determining the green status of a bond. Green bonds may be labeled and promoted as such by the issuer, such as the 2007 EIB issue; formally certified by a third party according to a set of guidelines; or, labeled green by a data provider, for example Bloomberg. We review the origins of the market and standards for identifying green bonds in the next section.