Financing the Response to Climate Change: The Pricing and Ownership of U.S. Green Bonds

Malcolm  Baker; Daniel  Bergstresser; George  Serafeim; Jeffrey  Wurgler

Working Paper | 2018

Financing the Response to Climate Change: The Pricing and Ownership of U.S. Green Bonds

by Malcolm Baker, Daniel Bergstresser, George Serafeim and Jeffrey Wurgler

Abstract

We study green bonds, which are bonds whose proceeds are used for environmentally sensitive purposes. After an overview of the U.S. corporate and municipal green bonds markets, we study pricing and ownership patterns using a simple framework that incorporates assets with nonpecuniary utility. As predicted, we find that green municipal bonds are issued at a premium to otherwise similar ordinary bonds. We also confirm that green bonds, particularly small or essentially riskless ones, are more closely held than ordinary bonds. These pricing and ownership effects are strongest for bonds that are externally certified as green.

Keywords: green bonds; pricing; climate change; Bonds; Environmental Sustainability; Financial Markets; Price; Ownership;

Language: English

Format: Print

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Citation:

Baker, Malcolm, Daniel Bergstresser, George Serafeim, and Jeffrey Wurgler. "Financing the Response to Climate Change: The Pricing and Ownership of U.S. Green Bonds." NBER Working Paper Series, No. 25194, October 2018.

In the face of accelerating climate change, investors are making capital allocations seeking to decarbonize portfolios by reducing the carbon emissions of their holdings. To understand the performance of portfolio decarbonization strategies and investor behavior towards decarbonization we construct decarbonization factors that go long low carbon intensity sectors, industries, or firms and short high carbon intensity. We consider several portfolio formation strategies and find strategies that lowered carbon emissions more aggressively performed better. Decarbonization factor returns are associated with contemporaneous institutional flows into the factors. Buying decarbonization factors when coincident flows are positive while selling when they are negative produces significantly positive alphas. Combining decarbonization factors that have positive contemporaneous flows would provide investors with significantly superior returns and continuous exposure to low carbon portfolios. The results are more pronounced in Europe relative to the US. Our results suggest that institutional investor flows contain information about anticipated fundamentals related to climate change developments.

Analyzing data from approximately 1.5 million employees across 1,100 established public and private US companies, we find that the strength of employee beliefs about their firm’s purpose is lower in public companies. This difference is most pronounced within the salaried middle and hourly ranks, rather than senior executives. Among public companies, purpose becomes progressively lower with more concentrated shareholders, especially among firms with high hedge fund ownership. These patterns can be partly explained by differences in CEO backgrounds and compensation: public firms, particularly those with strong shareholders, choose outsider CEOs at higher rates and pay them more relative to their employees. Our analyses suggest that these results are not driven solely by sorting effects, but appear attributable in part to the impact that firm owners have on their employees. In summary, shareholders appear to influence the strength of corporate purpose deep within organizations via the leadership and corporate practices they enable at the top.

Aperture Investors is a startup investment firm that seeks to disrupt the asset management industry through competitive differentiation by charging investors primarily when its portfolio managers outperform the marketplace. Headed by Wall Street veteran Peter Kraus and backed with substantial and patient seed capital, Aperture seeks to attract both star portfolio managers and assets from mutual funds and hedge funds. Kraus believes that his innovative business model addresses the current dysfunctional fee and incentive structures in the industry, which have led to long-term market underperformance, and that Aperture will address the reasons that are motivating investors to shift to cheaper, passively-managed index and exchange-traded funds.

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Financing the Response to Climate Change: The Pricing and Ownership of U.S. Green Bonds

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