Climate Policy and Corporate Green Bonds

Abstract

We find that green bonds exhibit higher capacity to borrow foreign capital in local currency than regular bonds issued by the same firm, which reduces currency mismatch risk in corporates' balance sheets while increasing that in investors'. We further show that this is driven by climate policy, which attract sustainable, responsible, and impact (SRI) investments that are willing to tolerate higher currency-mismatch risk for holding green bonds. In particular, adopting climate policy triples the probability of local currency green bond issuances in foreign markets. The impact of climate policy strengthens as carbon price rises. In response to rising carbon price, firms with stronger ESG and financial fundamentals, richer international financing experience, and from countries with better environmental performance, issue more local currency green bonds in foreign markets. There is no evidence that green bonds differ from regular bonds in the absence of climate policy.

Keywords: Climate change, carbon price, carbon tax, social impact, green finance, sustainable investing, socially responsible investing, ESG, international bonds, currency risk

JEL Classification: G18, F34, Q54, Q58