Geopolitical Crisis and the Green Bond Market: The Impact of the Russian Invasion of Ukraine on European and US Green Bond Markets

Abstract

Green bonds are fairly new, yet important financial tools in the fight against climate change, with various studies highlighting their role in achieving a more sustainable future. Different studies have investigated the "greenium"—the lower yield of green bonds compared to their conventional counterparts due to their environmental benefits. However, few studies have explored the impact of the Russian invasion of Ukraine, on the greenium in the European green bond market. This thesis investigated whether the Russian invasion of Ukraine has affected the greenium in the European green bond market, considering the environmental characteristics of green bonds and the effects of the invasion on Europe’s energy supply. By comparing yield to maturity and option adjusted spread differences between green bonds and their matched conventional counterparts, we estimated the presence of a greenium and use the same technique with US green and conventional bonds as a control group. This allowed a fair comparison of the greenium’s development in both markets. The results of this thesis indicate that, following the invasion, European green bonds have experienced a reduction in their greenium compared to US green bonds. This suggests that the war had a negative impact on the greenium in the European green bond market.

Green bonds are fairly new, yet important financial tools in the fight against climate change, with various studies highlighting their role in achieving a more sustainable future. Different studies have investigated the "greenium"—the lower yield of green bonds compared to their conventional counterparts due to their environmental benefits. However, few studies have explored the impact of the Russian invasion of Ukraine, on the greenium in the European green bond market. This thesis investigated whether the Russian invasion of Ukraine has affected the greenium in the European green bond market, considering the environmental characteristics of green bonds and the effects of the invasion on Europe’s energy supply. By comparing yield to maturity and option adjusted spread differences between green bonds and their matched conventional counterparts, we estimated the presence of a greenium and use the same technique with US green and conventional bonds as a control group. This allowed a fair comparison of the greenium’s development in both markets. The results of this thesis indicate that, following the invasion, European green bonds have experienced a reduction in their greenium compared to US green bonds. This suggests that the war had a negative impact on the greenium in the European green bond market.