On the Effect of Green Bonds on the Profitability and Credit Quality of Project Financing

Abstract

The relatively recent green bond market is increasingly attracting interest at the technical, regulatory, and academic research levels. Although a considerable body of research on green bonds focuses on the investor’s perspective, this study takes the perspective of a project finance sponsor to analyze whether there is a direct financial incentive for issuing green bonds in contrast to other types of financing. In order to measure the impact of green bond financing on the profitability and solvency of environmentally friendly investments, we study the sensitivity of the financial performance of a well-established project finance investment—the Sagunto regasification plant—to shifts in its financial structure. In particular, we develop a base case that allows us to study the impact of green financing compared to other financial structures typically used in project finance, under different scenarios. Our results show that in all cases, the internal rate of return (IRR) for shareholders is higher when green bonds instead of bank loans are issued to finance investments. Additionally, in the vast majority of the scenarios, green bond financing results in higher average debt service coverage ratios. Consequently, our results suggest that green bond financing constitutes a strong financial incentive for sponsors, which can help align their objectives with those of public authorities.

Energy efficiency financing and the role of green bond: policies for post-Covid period

“…Azhgaliyeva et al (2012) expressed that green bonds can be proposed as an efficiency tool to help increase energy efficiency of countries. This financing tool can motivate private investors (Alonso-Conde and Rojo-Suarez, 2020) to bring their free capital to the market of green projects. In addition, the IDB (2017) has developed the Energy Efficiency Green Bond Program in Mexico to boost up financing mechanism for energy efficiency projects through the green bonds.…”

Current state and future directions of green and sustainable finance: a bibliometric analysis

“…Concerns related to green banking, green bonds, Sukuk have been studied in this cluster. The authors (Alonso-Conde and Rojo-Suárez, 2020; Ngwenya and Simatele, 2020; Tuhkanen and Vulturius, 2020) investigated different aspects of green banking and bonds from the perspective of sustainability. The authors are connected strongly, while they do not have much connection outside their cluster.…”

The Outlook of the Green Bond Market in China

“…By comparing the advantages of green bonds over traditional project financing, green bond financing could bring higher satisfaction to shareholders than the traditional one. Nonetheless, the authors explained that the coordination between issuers and investors could motivate the consolidation of the green bond market [3]. A. Lichtenberger et al addressed that the green bond should be considered as a resultful financing tool to deal with climate change.…”