An Institutional Pressure and Adaptive Capacity Framework for Green Bonds: Insights from India’s Emerging Green Bond Market

Abstract

Although climate finance tools like green bonds have been gaining popularity in academia, the research has been limited to examining the financial viability and performance of this market. We explore a different research avenue related to institutional dynamics that are driving this market at the country level and shaping its adaptive capacity to climate change. Our paper introduces a new conceptual framework by linking institutional isomorphism with adaptive capacity dimensions in the green bond market. Using a mixed methods exploratory approach, we apply our institutional pressure-adaptive capacity framework to India’s green bond market. Our results show that different social actors, ranging from formal institutions like regulators and investors to informal ones like advocacy groups, can play a key role in shaping the legitimacy of this market. By highlighting ‘invisible’ social norms such as awareness about climate finance, changing regulatory priorities and the institutional strength of social actors, we contribute to the literature on this topic. We also introduce the concept of a high priority social actor and conclude that varying degrees of institutional pressure from such actors will ultimately decide the growth and legitimacy of this integral climate finance market at the country level as well as influence its adaptive capacity response to climate change.

Does It Pay to Issue Green? An Institutional Comparison of Mainland China and Hong Kong’s Stock Markets Toward Green Bonds

“…Therefore, the empirical results suggest that even without the government’s implicit coercive policies (such as that of Mainland China), both investors might have an environmental preference and prefer financial announcements that are in line with global voluntary disclosure practices (as seen in the case of Hong Kong market). Another finding in line with literature is that both stock markets were now merging toward integration in terms of market reactions, and this further legitimized the green bond market becoming more mainstream in the traditional financial sector ( Saravade and Weber, 2020 ). In addition, our study also showed that Mainland China’s financial market reactions were also moving closer to the international trends related to sustainable finance.…”

“…Others have identified potential drawbacks such as pricing differentials ( Hachenberg and Schiereck, 2018 ; Zerbib, 2019 ; Guo and Zhou, 2021 ) or lower returns between green and conventional bonds ( Bachelet et al, 2019 ; Larcker and Watts, 2020 ). Other studies have addressed green bond markets as an opportunity for both investors engaging with green finance ( Chiesa and Barua, 2019 ; Saravade and Weber, 2020 ) and for countries that will face significant climate risks in the future ( Broadstock and Cheng, 2019 ; Chiesa and Barua, 2019 ; Fatica and Panzica, 2021 ). To support the transition to a low-carbon economy, major institutional actors such as investors and governments have started to issue green bond policies and green fiscal measures to reduce climate risk exposure ( Monasterolo and Raberto, 2018 ; Hunt and Weber, 2019 ; Saravade and Weber, 2020 ; Fatica et al, 2021 ).…”

“…When an announcement is framed with dominant institutional logic, it leads to positive stock market reaction ( Rhee and Fiss, 2014 ). Institutional logic can be described as being in line with the strategy of a firm to transition to the green economy, such as through the issuance of a green bond or other green firm-level initiatives ( Saravade and Weber, 2020 ). Rhee and Fiss (2014) found that effectiveness of framing (or how aligned with institutional logic) and source credibility (the communicator of the announcement) depend on the institutional attributes such as announcer visibility, prior performance, and practice prevalence ( Rhee and Fiss, 2014 ).…”

“…Our paper looks to address this literature gap by linking the institutional dynamics of the green bond market to its stock market reactions. This is important because it has been assumed that only “hard laws” like regulations can work in China, whereas Hong Kong’s open market system needs more a “soft power” approach in influencing green bond market growth ( Huang and Yue, 2020 ) and its overall legitimacy ( Saravade and Weber, 2020 ). Our paper examines this assumption by comparing the two stock market reactions after green bond announcements.…”

Socio-political factors underlying the adoption of green bond financing of infrastructure projects: the case of Ghana

“…Saravade and Weber (2020) investigated the institutional characteristics that drive India's green bond market using a mixed-method exploratory approach. The findings reveal that a variety of social actors, ranging from formal institutions like regulators and investors to informal ones like advocacy groups, are critical in determining the validity of the green bond market.…”