The performance of green bond portfolios under climate uncertainty: A comparative analysis with conventional and black bond portfolios

Abstract

Green bonds represent an important financial instrument for the allocation of financial resources towards a more climate-friendly and sustainable economy. This research evaluates and compares the financial performance of portfolios of green bonds, conventional bonds and black bonds issued on the international market. Overall, bond portfolios perform similarly to each other and to the benchmark. The results also show that black bond portfolios bear more default risk and are more sensitive to the equity market than other bond portfolios. We further analyze the conditional effect of climate risk and find evidence of time-varying bond portfolio performance according to climate policy uncertainty. Although green bond portfolios underperform in times of lower uncertainty, they significantly improve their performance and even outperform their matched black bond counterparts when concerns surrounding climate risk rise.