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Abstract

In the last few years, there has been growing attention by enterprises and investors concerning the adoption and implementation of strategies and decisions characterised by a strong social and environmental impact. 2018 represented a fundamental year for renegotiations on the climate, in fact, following the COP 21, the aim was of both producing a "Rulebook" in order to carry out all the details received from the Paris agreement and a "Talanoa Dialogue" aiming at informing the parties of all the carried-out progresses. In this scenario, green bonds represent the financial tool that better meets the enterprises need to collect capital as well as the possibility of conveying the latter through strict obligations towards high environmental impact initiatives. Considering the high potential in using this tool, this work aims at investigating, in a double perspective, from both the issuing companies and the investors’ point of view, risks and opportunities. In particular, the possibility not only to diversify the financial sources but also to carry out a strategic plan to guarantee value creation in the long term (LTVC) and to preserve the environment. The most important goal of this work is to supply a reference framework conveying the main aspects to consider and evaluate.
Journal of Governance and Regulation / Volume 8, Issue 4, 2019
82
A NEW TOOL TO GATHER DEBT
CAPITAL: GREEN BOND.
RISKS AND OPPORTUNITIES FOR FIRMS
AND INVESTORS
Massimo Mariani *, Francesco Grimaldi **, Alessandra Caragnano *
* Faculty of Economics, LUM Jean Monnet University, Italy
** Corresponding author, Department of Economics and Finance, University of Bari Aldo Moro, Italy
Contact details: University of Bari Aldo Moro, Largo Abbazia S. Scolastica, 53, 70124 Bari, Italy
Abstract
How to cite this paper: Mariani, M.,
Grimaldi, F., & Caragnano, A. (2019). A new
tool to gather debt capital: Green bond.
Risks and opportunities for firms and
investors. Journal of Gover nance &
Regulat ion, 8 (4), 82-90.
https://doi.org/10.22495/jgrv8i4art7
Copyright © 2019 The Authors
This work is licensed under a Creative
Commons Attribution 4.0 International
License (CC BY 4.0).
https://creativecommons.org/licenses/by/
4.0/
ISSN Print: 2220-9352
ISSN Online: 2306-6784
Received: 12.10.2019
Accepted: 28.12.2019
JEL Classification: M14, O16, Q01, Q50
DOI: 10.22495/jgrv8i4art7
In the last few years, there has been growing attention by
enterprises and investors concerning the adoption and
implementation of strategies and decisions characterised by a
strong social and environmental impact. 2018 represented a
fundamental year for renegotiations on the climate, in fact,
following the COP 21, the aim was of both producing a "Rulebook"
in order to carry out all the details received from the Paris
agreement and a "Talanoa Dialogue" aiming at informing the
parties of all the carried-out progresses. In this scenario, green
bonds represent the financial tool that better meets the enterprises
need to collect capital as well as the possibility of conveying the
latter through strict obligations towards high environmental impact
initiatives. Considering the high potential in using this tool, this
work aims at investigating, in a double perspective, from both the
issuing companies and the investors' point of view, risks and
opportunities. In particular, the possibility not only to diversify the
financial sources but also to carry out a strategic plan to guarantee
value creation in the long term (LTVC) and to preserve the
environment. The most important goal of this work is to supply a
reference framework conveying the main aspects to consider and
evaluate.
Keywords: Climate Change, Debt Capital Markets, Green Bonds,
Green Projects, Long Term Orientation
Authors’ individual contribution: Conceptualization M.M., F.G., and
A.C; Methodology F.G. and A.C; Writing Original Draft M.M.,
F.G., and A.C; Writing Review & Editing M.M., F.G., and A.C;
Visualization M.M., F.G., and A.C; Project Administration M.M.
and F.G.; Supervision M.M. and F.G.
1. INTRODUCTION
In recent years we have witnessed the progressive
attention of both companies and investors regarding
the adoption and implementation of decisions with a
high social and environmental impact (Eccles,
Ioannou, & Serafeim, 2014). Sustainable development
originates from the macroeconomic level (Hanley,
2000) and it is grounded in the three principles:
environmental integrity, economic prosperity, and
social equity which are commonly referred to as the
three pillars of sustainability (Barbier, 1987; Elliott,
2005). The economic and financial sector has been
increasingly faced with sustainable development
(Gladwin, Kennelly, & Krause, 1995; Shrivastava,
1995; Westley & Vredenburg, 1996; Dyllick &
Hockerts, 2002; Bansal, 2002, 2005; Springett, 2003;
Figge & Hahn, 2005; Etzion, 2007; Goodall, 2008).
It is now generally accepted that without
corporate support, society will not achieve
sustainable development, as firms represent the
productive resources of the economy (Bansal, 2002).
Sustainability as a phenomenon is rapidly entering
economic and financial literature. Initially, the
concept was launched in the environmental
interpretation during United Nations conferences in
Journal of Governance and Regulation / Volume 8, Issue 4, 2019
83
the 1970s and 1980s. The key concept of
sustainability is that an explicit connection should
be made between present and future generations.
The best-known general definition of sustainable
growth, for example, is the one given by the World
Commission on Environment and Development
(WCED) in Our Common Future (1987): “sustainable
development is a development that meets the needs
of the present without compromising the ability of
future generations to meet their own needs”.
Applying this sustainability concept to
corporate finance, it’s possible to show two different
aspects, firstly there is the capital raising, which
implies that finance is very well suited to realize (or
not to realize) “future generation’s needs”. Secondly,
if financial processes are assumed to reflect
underlying real economic processes, rather than a
goal in itself, it is important to stress a financial
policy aimed at integrity and trust in the longer run
(Soppe, 2004).
The combination of sustainability and
profitability is not an impossible concept, in fact, as
shown in the existing literature, since the early 70s,
scholars have investigated this aspect.
There are several analyses that demonstrate
how the implementation of more sustainable
practices can improve firm competitiveness and
profitability. The first works are attributable to
Moskowitz (1972) and Bragdon and Martin (1972)
who have highlighted, through the implementation
of empirical research, the existence of a link between
the level of atmospheric pollution and corporate
performance. In such a scenario, sustainable finance
and triple bottom line (TBL) are two related
constructs that are used interchangeably in the
literature. Sustainability triple bottom line provides
a framework in order to measure the performance of
the business and the success of the organization
using three lines: economic, social, and
environmental (Dyllick & Hockerts, 2002; Schaltegger
& Burritt, 2005; Goel, 2010). Triple bottom line
expresses the expansion of the environmental
agenda in a way that integrates the economic and
social lines (Elkington, 1997).
In his definition of TBL, Elkington (1997) used
the terms profit, people, and the planet as the three
lines. In his study, the economic, social, and
environmental lines are referred to profit, people,
and planet respectively. Sustainable finance
highlights the mechanism underlying the process
from attention to environmental, social, and
governance issues to generate financial returns, but
it also highlights the use of financial returns to
further advance ESG (Scholtens, 2006). Originally it
was used the term environmentally responsible
development” (World Bank, 1992). Subsequently,
“environmentally sustainable development was
employed (Serageldin & Steer, 1993). Finally, the
concept of environmental sustainability was
developed (Goodland, 1995). According to Goodland
(1995), environmental sustainability “seeks to
improve human welfare by protecting the sources of
raw materials used for human needs and ensuring
that the sinks for human wastes are not exceeded, in
order to prevent harm to humans”. Goodland’s
conceptualization of environmental sustainability
fits into the resource-limited ecological economic
framework of “limits to growth”. An important
contribution to the concept of environmental
sustainability was made by the OECD (Economic Co-
operation and Development) Environmental
Strategy for the First Decade of the 21st Century
(OECD, 2001). Such a scenario led to the genesis and
spread of new financial tools, combining typical
aspects of economic-financial nature and social,
environmental and corporate governance needs.
Green bonds are perfectly integrated into this
context, offering an alternative in line with green
principles and themes, for enterprises as a tool to
gather a debt, as well as for investors in terms of
capital allocation. In 2014 the International Capital
Market Association (ICMA) added to the overall
market sophistication when launching the first
version of the Green Bond Principles (GBP). The
Green Bond Principles are considered the guidelines
for most issuers’ green bond frameworks (Kaminker
& Sachs, 2018). Moreover, the GBP recommend a
clear process and disclosure for issuers, which
investors, banks, underwriters, placement agents
and others may use to understand the
characteristics of any Green Bond. The GBP stress
the required transparency, accuracy and integrity of
the information that will be disclosed and reported
by issuers to stakeholders.
In such scenario, 2018 represented a crucial
year for International Climate negotiations since the
2015 Paris summit, as all the delegates in the 24th
session of the Conference of the Parties (COP) to the
UN Framework on Climate Change (UNFCCC) met in
Katowice (in Poland) aiming at producing a
Rulebook” implementing all details received from
the Paris agreement. It must be underlined that
besides the Rulebook drawing up, delegates
concluded the Talanoa Dialogue, a year-long
assessment of progress towards the Paris Agreement
long-term goals, which is meant to inform parties as
they prepare for a new round of nationally
determined contributions (NDCs) in 2020. In light of
this premise, the green bond market represents a
different way to facilitate and support green
investments and also an alternative financial source
compared to bank lending and equity financing.
This work aims at investigating, in a double
perspective, from both the issuing companies and
the investors' point of view, risks and opportunities,
so to supply a reference framework conveying the
main aspects to consider and evaluate.
The remainder of the paper is organised as
follows. Section 2 describes the literature review;
Section 3 will be dedicated to the observation and
trend of the green bonds market; Section 4 reports
and discusses the tool risks and opportunities in a
double vision, both of the issuing company and
investors. The last section concludes the paper.
2. LITERATURE REVIEW
The last few years saw the development of a series
of new financial tools better answering the
principles underlying sustainability themes, as Green
Bonds, namely debt tools whose income can be used
to finance or refinance new or existing projects and
activities promoting the progress of economic
sustainable activities”. Green bonds could be broadly
classified based on the assets to which they are tied
(standard green use of proceeds bond, green
revenue bond, green project bond, green securitized
bond (ICMA, 2018)).
Journal of Governance and Regulation / Volume 8, Issue 4, 2019
84
It is, therefore, possible to identify green bonds
as alternative financial tools foreseeing their income
destination for the financing or refinancing of green
projects, namely activities dealing with initiatives for
the promotion of climatic or environmental
sustainability (Kidney & Oliver, 2014). It is possible
to observe how definitions allow the reference to a
wide range of investments and issuers, concerning
who wants to promote its own “green credentials
deriving from implemented projects benefits as well
as those who want to cynically use the focus on the
environment as a marketing tool (Ramiah &
Gregoriou, 2015). In 2014 the International Capital
Market Association (ICMA) added to the overall
market sophistication when launching the first
version of the Green Bond Principles (GBP). The GBP
are “voluntary process guidelines that recommend
transparency and disclosure, and promote integrity
in the development of the Green bond market by
clarifying the approach for issuance of a Green
Bond”. The Green Bond Principles are considered to
be the guidelines for most issuers’ green bond
frameworks (Kaminker & Sachs, 2018). Moreover, the
GBP recommend a clear process and disclosure for
issuers, which investors, banks, underwriters,
placement agents and others may use to understand
the characteristics of any Green Bond.
The GBP highlight the required transparency,
accuracy and integrity of the information that will be
disclosed and reported by issuers to stakeholders.
Finally, the GBP have four core components:
1) use of proceeds;
2) process for project evaluation and selection;
3) management of proceeds;
4) reporting.
Currently, in literature, there isn’t a Green Bond
univocally recognized definition, therefore here
below it is possible to find the description proposed
by the Green Bond Principles (GBP) drawn up by the
International Capital Market Association (ICMA,
2018): “green bonds are any type of bond instrument
where the proceeds will be exclusively applied to
finance or refinance, in part or in full, new and/or
existing eligible Green projects and which are aligned
with the four core components of the GBP”.
This definition is the reading key which really
explains the difference between green bonds and
traditional bonds. Labelled green bonds have
financial characteristics that are like standard
corporate bonds, full recourse goes to the issuer,
may be not to revenues coming from a specific
project, and there are no particular green”
covenants or legal consequences that link issuers to
their sustainability promises.
In fact, the analogy of green bonds and
conventional bonds is meant to stimulate market
growth by using a well-tested product, and it enables
issuers to show they are committed to sustainability
(Barclays, 2015). It is possible to identify several
reasons that could push to invest in green bonds,
among which ethical, reputational and regulatory
considerations as well as those in relation to the
long-term risk-revenue relationship (Zerbib, 2016).
HSBC (2016) and Ehlers and Packer (2016)
study the difference in yield at issuance between
green and conventional bond by taking the
difference between the two yields on samples of 30,
21 and 14 bonds respectively. Recently, the paper of
Tang and Zhang (2018) investigated the
announcement returns and real effects of green
bond issuance by firms in 28 countries considering
the years from 2007 to 2017. Their findings revealed
that stock prices positively respond to green bond
issuance.
Furthermore, they did not find a significant
premium for green bonds; finally, they concluded
that the firm issuance of green bonds is beneficial to
its existing shareholders. The same year Gianfrate
and Peri (2019) compared green bonds and
traditional bonds with similar characteristics in
order to investigate if green bonds are priced at a
premium, finding a negative premium of around 18
basis points for Green bonds.
Moreover, they demonstrated the premium in
the secondary market as well. Finally, they
concluded that green bonds are relatively more
convenient for issuers as there is a premium in the
pricing of these new financial tools.
In 2017, Karpf and Mandel carried out an
analysis aiming at evaluating the differences in the
yield term structure between green and brown
bonds, observing that there is a significant and
positive spread on returns between brown and green
bonds. Regarding the “investor clienteles” the
existing literature indicates several categories of
investors who, in relation to their preferences, invest
in different companies. In particular, it is mentioned
a dividend clientele (Graham & Kumar, 2006) or in
general the existence of “style” investors searching
specific company profiles (Barberis & Shleifer, 2003).
Regarding the existence of an investor clientele,
attracted to financial tools oriented towards the long
period, as well as to environmental safeguard,
literature shows that better ESG performances
promote the access to capital (Cheng, Ioannou, &
Serafeim, 2013; El Ghoul, Guedhami, Kwok, & Mishra,
2011), furthermore, there are several empirical
studies (Margolis & Walsh; 2001; Griffin & Mahon;
1997; Roman, Hayibor, & Agle, 1999), highlighting
how the implementation of green projects
potentially creates superior performances, as the
relative default risk is reduced. Finally, part of the
most recent literature focuses the attention on
investors preferences regarding Environmental,
Social and Governance factors (Barber, 2007;
Dimson, Karakas, & Li, 2015; Dyck, Lins, Roth, &
Wagner, 2019; Starks, Venkat, & Zhu, 2017;
Hachenberg & Schiereck, 2018; Paranque & Revelli,
2019).
3. OUTLOOK OF EUROPEAN GREEN BOND MARKET
Green bonds have become increasingly popular in
recent years, Morgan Stanley refers to this evolution
as the green bond boom” (Flammer, 2018). The
green bond market kicked off in 2007 with the AAA-
rated issuance from multilateral institutions
European Investment Bank (EIB) and World Bank and
represented by June 2019 a total of approximately
EUR 550bn outstanding (EUR 100bn YTD).
As a consequence, several other supranational
agencies joined the playground with the aim of
assisting governments in reaching their policies
related to climate change mitigation. The most active
supranational issuer has been the World Bank, with
a total of 136 individual green bond issuances in 18
Journal of Governance and Regulation / Volume 8, Issue 4, 2019
85
different currencies dated between 2008 and 2016,
as reported by the Climate Bonds Initiative. After the
period between 2007 and 2012, the market grew
thanks to the issuances of Sovereign, Supranational
and Agencies (SSA), municipalities, local government
agencies and national developments banks.
The rising consensus obtained from the market
has been further enhanced by progress made in
terms of standards and criteria defining a green
project or activity; these positive developments led
to the second milestone in 2013: corporations
surrendered to the lure of green bonds and joined
the market, widening the typology of issuers
(Trompeter, 2017).
In the following years, the number of green
bond issues increased, the size of the green bond
market at the end of 2017 was estimated to amount
to USD 270 billion (Bos, Meinema, & Houkes, 2018),
after another year with record issuances of USD
155.5 billion from 239 different issuers (Climate
Bonds Initiative, 2018).
The rapid development of the market becomes
especially evident when looking at year-on-year
growth. According to S&P (2018), the green bond
market has grown by at least 80% every year for the
past five years reaching new record levels year after
year. The overall growth of the market naturally
leads to increased diversification. While in 2016 we
saw green bonds being issued from 27 countries,
this number increased to 39 countries within one
year (Moody’s, 2018). Similarly, the number of
inaugural green bond issuances more than doubled
in 2017 compared to the previous year (Leister &
Gustermann, 2018).
This positive trend confirms the progressive
attention towards "green" issues and relative
awareness by all market players to engage in
concrete actions to transition to a low-carbon society
(Campiglio, 2016).
In 2014 the International Capital Market
Association (ICMA) added to the overall market
sophistication when launching the first version of
the Green Bond Principles (GBP). The GBP are
voluntary process guidelines that recommend
transparency and disclosure, and promote integrity
in the development of the Green bond market by
clarifying the approach for issuance of a Green
Bond”. The Green Bond Principles are considered to
be the guidelines for most issuers’ green bond
frameworks (Kaminker & Sachs, 2018).
Moreover, the GBP recommend a clear process
and disclosure for issuers, which investors, banks,
underwriters, placement agents and others may use
to understand the characteristics of any Green Bond.
The GBP emphasize the required transparency,
accuracy and integrity of the information that will be
disclosed and reported by issuers to stakeholders.
Finally, the GBP have four core components:
1. Use of proceeds: the eligible Green Projects
categories, listed in no specific order, include, but
are not limited to: renewable energy, energy
efficiency, pollution prevention and control,
environmentally sustainable management of living
resources and land use, terrestrial and aquatic
biodiversity conservation, clean transportation,
sustainable water and wastewater management,
climate change adaptation, eco-efficient and/or
circular economy adapted products, production
technologies and processes, green buildings (ICMA,
2018).
2. Process for project evaluation and selection:
the issuers of a green Bond should clearly
communicate to investors the environmental
sustainability objectives; the process by which the
issuers determine how the projects fit within the
eligible Green Projects categories identified above;
the related eligibility criteria, including, if applicable,
exclusion criteria or any other process applied to
identify and manage potentially material
environmental and social risks associated with the
projects.
3. Management of proceeds: the Green Bond
net proceeds, or an amount equal to these net
proceeds, should be credited to a sub-account,
moved to a sub-portfolio or otherwise tracked by the
issuer in a formal internal process linked to the
issuer’s lending and investment operations for
Green projects (ICMA, 2018).
4. Reporting: the issuer has to provide up-to-
date information on the effective use and allocation
of proceeds. If possible, the issuer must make
available documents with the list of projects to
which proceeds have been allocated, followed by a
brief description of the projects themselves, the
amount reserved for each of them and the
predictable effect (ICMA, 2018). The issuer has to
provide up-to-date information on the effective use
and allocation of proceeds. If possible, the issuer
must make available documents with the list of
projects to which proceeds have been allocated,
followed by a brief description of the projects
themselves, the amount reserved for each of them
and the predictable effect (ICMA, 2018).
In June 2018, the European Commission set up
a Technical Expert Group on sustainable finance
(TEG) aiming at supplying assistance in four key
areas of the Action Plan through the development of
the following:
a unified classification system for sustainable
economic activities;
a European Union (EU) Green Bond Standard;
benchmarks for low-carbon investment
strategies, and
guidance to improve corporate disclosure of
climate-related information.
The TEG proposes that the Commission creates
a voluntary, non-legislative EU Green Bond Standard
to enhance the effectiveness, transparency,
comparability and credibility of the green bond
market and to encourage the market participants to
issue and invest in EU green bonds. The TEG
recommends that an EU Green Bond could be any
type of listed or unlisted bond or capital market
debt instrument issued by a European or
international issuer that is aligned with the EU Green
Bond Standard.
Building on best market practices, the EU Green
Bond Standard would comprise four critical
elements (see Table 1).
Journal of Governance and Regulation / Volume 8, Issue 4, 2019
86
Table 1. Promoting market integrity: four critical elements
No.
Description
1
Alignment with EU taxonomy proceeds from EU Green Bonds should go to finance or refinance projects/activities that (a)
substantially contribute to at least one of the six taxonomy Environmental objectives, (b) do not significantly harm any of
the other objectives and (c) comply with the minimum social safeguards. Where (d) technical screening criteria have been
developed, financed projects or activities shall meet these criteria, allowing however for specific cases where these may not
be directly applicable.
2
Publication of a Green Bond Framework, which confirms the voluntary alignment of green bonds issued with the EU GBS,
explains how the issuer’s strategy with the environmental objectives, and provides details on all key aspects of the
proposed use of proceeds, processes and reporting of the green bonds.
3
Mandatory reporting on the use of proceeds (allocation report) and on environmental impact (impact report).
4
Mandatory verification of the Green Bond framework and final allocation report by a n external reviewer.
Source: Report on EU Green Bond Standard (June 2019)
4. RISKS AND OPPORTUNITIES
The ultimate goal of companies is to use resources
efficiently and to maximize risk-adjusted return on
capital (Jensen & Meckling, 1976) and to increase
shareholders wealth (Friedman, 1970).
Diversification of capital sources is a central topic
since the work of Ansoff (1958), starting with the
study of Jensen and Meckling (1976), financial
choices have been evaluated because of the close
interaction between capital structure and
management choices (Barton & Gordon, 1987). In the
last few years, because of the 2007-2008 financial
crisis that involved all the main countries in the
world, there was a progressive reduction of
financing possibilities for enterprises (Cingano,
Manaresi, & Sette, 2016; Wehinger, 2014). Within this
framework, there was a natural and increasing shift
from an enterprise financial structure with a third-
party capital extremely oriented towards the bank
channel, to another one in which there was a
convergence towards other financing forms
(Dallocchio & Salvi, 2011).
However, Brealey, Myers, Allen, and Sandri
(2011) suggest that in examining the various
financing sources at the company disposal, it is
quite common that management asks some
questions concerning the impact that current
choices regarding capital structure composition will
produce on future ones. Graham and Harvey (2001),
Bancel and Mittoo (2004), and Brounen, De Jong, and
Koedijk (2004) highlight how important it is for
company management to take some good decisions
regarding capital structure and relative financial
flexibility. In such sense, the financial flexibility
topic is seen as the company capacity to address the
use of financial resources in a manner consistent
with company objectives, emerging from the new
information on the company as well as from the
environment in which it operates and that holds and
carries out a central role (Gamba & Triantis, 2008).
Graham and Harvey (2001) define financial flexibility
as preserving debt capacity to make future
expansions and acquisitions” or minimizing interest
obligations” so that they don’t need to shrink their
business in case of an economic downturn.
Donaldson (1969) uses the term financial mobility
to indicate the capacity to consistently channel
financial resources with the evolution of
management objectives as it is necessary to consider
the transformation of both the company and
surrounding environment. Donaldson himself
specifies that financial flexibility mainly regards the
decisions relative to capital structure, whose main
objective is to detect the best mix of financing
sources. Therefore, a balanced and integrated
understanding of financial flexibility effect requires
simultaneous attention concerning various
investment opportunities, expected cash flows and
financial constraints (Byoun, 2011). The different
definitions of flexibility as addressed in literature
recognizes the “reactive” or “preventive” nature of
flexibility while failing to include the “exploitive”
nature of flexibility for uncertain competitiveness or
opportunities. This combination between the
preventive and exploitive nature of flexibility is
evident in Volberda (1999) because he studied
flexibility in two perspectives: internal flexibility as
the firm capacity to adapt to the request of the
environment, and external flexibility as the firm
capacity to incline their environment and thereby
reduce their vulnerability. In this perspective, we do
not only take into account economic-financial
variables towards financing sources diversification,
but also intangible values able to identify the asset
nature and define its purpose.
Additional food for thought, in order to
investigate why companies, issue green bonds are
three; first, green bonds may serve as a credible
signal that the proceeds will be invested in green
projects, thus affirming the company commitment
to corporate sustainability. Second, and conversely,
green bonds could be a form of greenwashing, which
is of particular concern given the absence of legal
enforceability. Third, companies may issue green
bonds to attract an investor clientele that values
both the long term and the natural environment
(Flammer, 2018).
The issuance of green bonds can be interpreted
through the lens of the signalling theory, investors
often lack sufficient information to evaluate the
company commitment to the environment (Busch &
Hoffmann, 2009; Lyon & Maxwell, 2011; Lyon &
Montgomery, 2015); by issuing green bonds,
companies can signal their commitment and this
signal might be plausible, firstly because by issuing
green bonds, companies commit substantial
amounts of money to green projects, secondly green
bonds are often certified by independent third
parties to guarantee that the proceeds are used to
finance or refinance the green projects that in the
bond prospectus. Finally, the issuance of green
bonds may serve as a credible signal of the company
commitment to the environment and attracting new
investors and tapping a wider investor base. From
the investors’ point of view, green bonds represent a
particularly interesting financial tool under many
aspects. For example, for some people green bonds,
are the implicit answer to the desire of sharing
intangible values; the latter can be seen through the
Journal of Governance and Regulation / Volume 8, Issue 4, 2019
87
proceeds destined to projects having a strong
environmental impact (tangible value). As shown in
the Emerging Market Green Bonds Report 2018,
further benefits can be found in:
offer long-term maturities with stable and
predictable returns with given risk exposure;
supply environmental benefits;
meet environmental, social, and governance
(ESG) requirements for sustainable investment
mandates (i.e. when ESG standards, such as IFC
Performance Standards are applied to green
projects);
allow direct investment in the “greening of
brown sectors and social impact activities;
offer increased transparency and
accountability on the use and management of
proceeds.
5. DISCUSSION
A series of managerial implications can be deduced
not only for issuers and investors but also for
countries and governments.
Reference was made to some recent papers
stressing the importance assumed by Green Bonds,
for example in the conclusion of the paper of
Gianfrate and Peri (2019) they underline that: “Green
bonds can represent an effective instrument for
achieving a lower cost of capital for organizations
that need to finance or refinance Green projects”;
another research of Tang and Zhang (2018) suggests
that issuing green bonds could gain more media
exposure and therefore several opportunities for
companies to advertise their environmental
perspectives.
Finally, they suggest that shareholders can
benefit from issuing green bonds due to improved
stock liquidity, thus, briefly, green bonds seem
sound investment instruments to invest in. As
shown in the Emerging Market Green Bonds Report
2018, green bonds popularity, whose demand
actually exceeds the offer, highlights the fact that
investors are particularly attracted to financial tools
having a strong environmental impact issued by
companies having undertaken a strategic path aimed
at sustainability. The same are greatly helped in
accessing the debt capital market.
The principles, processes, and definitions that
have appeared to simplify green bond issuance make
it much easier for responsible investors and green
issuers to connect and transact. This also opens
dialogue on other types of green investments,
including projects or sectors that would have been
less accessible. Successful approaches in green
finance now also help the growth of social finance.
Green bonds create a market-driven demand
for improved environmental, social, and governance
(ESG) disclosure by companies and financial
institutions.
This will have a tangible knock-on benefit in
facilitating sustainable finance across a range of
asset classes and financial products. It also enhances
the ability of regulators to assess ESG risks and
green finance flows at the market level, enabling
them to structure regulation and incentives to drive
more capital to sectors with high environmental and
social benefits.
These benefits reveal the importance of quality
information disclosure from issuers to investors in
order to enjoy the benefits of issuing green bonds.
This disclosure, especially concerning the use of
proceeds, is one of the main differences between
conventional bonds and green bonds.
6. CONCLUSION
In the last few years, the agenda for global
sustainability has greatly advanced together with the
supranational bodies and in this perspective, the
COP 21 that took place in Paris in 2015, has played a
fundamental role.
The actors involved in the financial markets
have conveyed resources and efforts aiming at
supporting sustainable economic development in the
long term.
Most stakeholders recognized the need to
“redirect” the financial markets in order to satisfy
the global needs of sustainable development and
guarantee value creation in the long term (LTVC).
Through some estimates supplied by the United
Nations it is foreseen that by 2050, 2.5 billion people
will migrate from the rural areas to the urban ones,
with around 90% of this increase concentrated in the
emerging markets, while cities and urban areas will
offer important economic development
opportunities and will become also increasingly
vulnerable to climate changes.
Therefore, in such a scenario, the role assumed
by sustainable finance becomes particularly
interesting as it highlights in which way economics
and finance can interact with the economic, social
and environmental world. Dirk Schoenmaker in a
2017 essay stresses that sustainable finance has the
potential to move from finance as a goal (profit
maximisation) to finance as a means. Therefore, the
presence of a clear and shared set of regulations
plays a necessary role and in this way, the
commitment and efforts promoted by the European
Commission aim at the promotion of greater
markets transparency and effectiveness, especially
in a framework of development and capital
allocation through “green” financial tools.
In conclusion, if some contributions already
indicate a lower cost of debt for green bonds issuers
if compared with traditional ones, on the other side
the European framework will create an increasing
demand of “green” financial tools to which a
growing amount of capitals will be shifted.
The main limitation of this study is the lack of
existing literature focused on green bonds because
the topic is very recent and very few studies
analysed green bonds. However, we have referred to
the most important researches on green bonds in
order to provide a complete framework.
In this perspective, future research includes the
implementation of a more extended reference
framework, for example considering also the
financial literature on traditional bonds in order to
compare the risks and opportunities related to these
tools. Another frontier of future research is the
investigation of different perspectives in order to
catch other relevant aspects.
Journal of Governance and Regulation / Volume 8, Issue 4, 2019
88
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