Investors in Green Bonds

Abstract

Using data on the universe of holdings in bonds traded in Norway 2010-20, we describe the characteristics of real-world green investors. We do so by comparing investors of Norwegian green bonds to those of similar non-green bonds by the same issuers. Although green bonds only constitute a small fraction of portfolios, their investors exhibit a distinct investment strategy. Theory describes green preferences as a trade-off with financial preferences, where the presence of green preferences shields investors, allowing them to take on more financial risk. Consistent with this prediction, we find that green investors hold riskier portfolios with more defaults. They invest in smaller, but more profitable issuers with higher financial leverage. Their portfolio firms have lower ESG ratings and higher CO2 emissions, which supports a consequentialist rather than a warm-glow motive of investment.