Risk in decarbonisation finance

IDRIC Project MIP 3.3

Background

There have been over 5,000 certified green bonds issued in the last decade with the cumulative issuance exceeding $500 billion in 2021 alone.  The market issuance for green and sustainability bonds is projected to reach 5 trillion by 2025.

Green bonds are crucial instruments of governments and corporations as they attempt to finance a green transitions and meet decarbonization targets. The relatively recent emergence of these financial instrument means they are not well understood.  They are a unique market closely associated to the regular market for bonds, but differentially influenced by regulatory requirements and global treaties for compliance to climate change goals.

Professor Heather McGregor

Prof Heather McGregor

Co-Principal Investigator
Heriot-Watt University

Prof Dimitris Christopoulos

Prof Dimitris Christopoulos

Co-Principal Investigator
Heriot-Watt University

Project Team

Heriot-Watt University:

Dr George Tzougas
Dr Chih Yueh Huang
Dr Marta Campi
Dr Chenyan Lyu

Aim

We have reviewed the network of organisations involved in decarbonisation finance and have employed algorithmic analysis as well as mixed methods research designs to comprehensively determine risks in these financial instruments.

Our overall aim has been to define the risk management profile of decarbonisation funding in the UK and Europe. Our findings will aid capital distribution and resource allocation strategies, and examine the compliance of such strategies with green finance and environmental monitoring regulations.

More Detail

Green Bond framework documents stipulate what will be the use of proceeds from the bond i.e. green infrastructure, investment in green technology etc.  Framework documents also specify what are the project selection success and targets, stipulating penalties if these are not reached as well as the environmental impact of fund disbursement on climate mitigation and carbon neutralisation. For industrial decarbonisation to proceed at pace there has to be an equivalent speed in funding innovation in decarbonization. This depends on issuers and underwriters understanding the risks associated with this funding, which in turn depend on a complex set of interrelated socioeconomic systems.  Our project provides a comprehensive understanding of these risks as guidance to industry standards and policy.

Meet the Team

Team 1

Dr Chenyan Lyu

Heriot-Watt University

Team 1

Dr George Tzougas

Heriot-Watt University

Team 1

Dr Chih Yueh Huang

Heriot-Watt University

Team 1

Dr Marta Campi

Heriot-Watt University

Team 1

Dr Chenyan Lyu

Heriot-Watt University

Team 1

Dr George Tzougas

Heriot-Watt University

Team 1

Dr Chih Yueh Huang

Heriot-Watt University

Team 1

Dr Marta Campi

Heriot-Watt University

Case Study/Example

Matching Green and Brown Bonds

  • About 20% of green bonds receive a change in credit rating during the life of the bond from the rating issued at launch (11% downgraded, 9% upgraded)
  • The major rating agencies do not always agree on bond ratings (affects 5% of bonds)
  • Bond ratings are not always the same with the issuer’s rating

WORK PACKAGES

  1. Matching green and brown bonds to ratings, performance and bond yields
  2. Green Bonds and ESG scores
  3. Alternative Taxonomies and the emergence of a green standard
  4. Liquidity in the Green bond market
  5. CO22 markets and their impact on the green transition
  6. Variance in technology frontiers and its effect on risk in green bonds
  7. Policy implications of risk in green bonds to the green transition

Planned Outputs

Multiple peer reviewed conference papers delivered and a number of journal papers under review.