Climate Change in the Capital Markets: A Study of Actively Managed Green Bond Funds

Abstract

In this study, we carried out a performance analysis of green bond portfolios available from public databases for the period between 2017 and 2020. The aim of our research was to obtain empirical proof for the existence of the green premium, which was confirmed by risk-adjusted indicators, i.e. the Sharpe ratio, the M2 ratio and the Sortino ratio. The green premium is the return differential that can be measured between green and conventional financial instruments. According to the literature, investors are willing to forego 1 to 9 basis points of their returns in the interests of financing climate targets, to cover the issuer’s extra costs incurred from green bond ratings and reporting obligations. Our results confirmed that the green bond portfolio underperforms benchmark indices by an average green premium of 2 basis points. We only found a single green bond fund that did not involve a green premium and was capable of achieving a risk-adjusted excess return. Nevertheless, it is noted that all of the indicators used showed that the average performance of green bonds improved steadily each year in the period under review.