An econometric analysis of factors that influence the performance of green bonds in emerging markets

Abstract

Developing nations are the most vulnerable to the effects of Climate change. This acts as a hindrance in the fight against poverty and improving the livelihoods of their citizens. Green bonds were created to finance projects that fight climate change. They are intended to help developing countries fight climate change while they grow their economies. The perfonnance of green bonds in developed markets has been analyzed in numerous studies but there exists a deficiency in the emerging market space. This study involves econometrically analyzing factors that influence the performance of green bonds in emerging markets. The countries used in this study are Brazil, Mexico, and South Africa as they have successfully issued these securities. These factors include macroeconomic and stock market conditions as the independent variables. The number of active green bonds acts as the dependent variable. The macroeconomic conditions include short term interest rates, exchange rates, industrial output, and inflation. The macroeconomic conditions are represented by Treasury bill rates, Real Broad Effective Exchange Rate, the Industrial Production Index, and Consumer Price Index of the selected countries. The stock market conditions are represented by the countries' stock indices. Panel data regressions are used. The model used to evaluate the factors that influence the performance of green bonds in the selected countries was found to not be jointly significant given the macroeconomic conditions specified in the regression. The Consumer Price Index is the only significant macroeconomic variable. The second model sought to identify the implications of stock market conditions on the performance of green bonds in the selected countries. It was found that stock market conditions have a positive but insignificant influence on the overall green bond market in the selected countries. Green bonds issued by corporates are found to be the most popular in developing countries, but higher amounts are issued by agencies, and Municipal bonds are seen to pay higher coupons.