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Sovereign Green Bonds: A Catalyst for Sustainable Debt Market Development?

Author

Listed:
  • Gong Cheng
  • Torsten Ehlers
  • Frank Packer
  • Yanzhe Xiao

Abstract

In traditional bond markets, sovereign bonds provide benchmarks and serve as catalysts for the corporate bond market development. Contrary to the usual sequence of bond market development, sovereign issuers are latecomers to sustainable bond markets. Yet, our empirical study finds that sovereign green bond issuance can have quantitative and qualitative benefits for the development of private sustainable bond markets. Our results suggest that both the number and the size of corporate green bond issuance increase more in a jurisdiction after the sovereign debut. The results are more pronounced in countries with stronger climate policies. Sovereign green bond issuance also improves the quality of green verification standards in the corporate bond market more generally, consistent with the aim of fostering third-party reviews and promoting best practice in green reporting and verification. Finally, our work provides evidence that the sovereign debut increases liquidity and diminishes yield spreads of corporate green bonds in the same jurisdiction.

Suggested Citation

  • Gong Cheng & Torsten Ehlers & Frank Packer & Yanzhe Xiao, 2024. "Sovereign Green Bonds: A Catalyst for Sustainable Debt Market Development?," IMF Working Papers 2024/120, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2024/120
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    References listed on IDEAS

    as
    1. Gong Cheng & Eric Jondeau & Benoît Mojon, 2022. "Building portfolios of sovereign securities with decreasing carbon footprints," Swiss Finance Institute Research Paper Series 22-66, Swiss Finance Institute.
    2. Kathy Yuan, 2005. "The Liquidity Service Of Benchmark Securities," Journal of the European Economic Association, MIT Press, vol. 3(5), pages 1156-1180, September.
    3. Durbin, Erik & Ng, David, 2005. "The sovereign ceiling and emerging market corporate bond spreads," Journal of International Money and Finance, Elsevier, vol. 24(4), pages 631-649, June.
    4. Fabella, Raul & Madhur, Srinivasa, 2003. "Bond Market Development in East Asia: Issues and Challenges," ADB Economics Working Paper Series 35, Asian Development Bank.
    5. Torsten Ehlers & Benoit Mojon & Frank Packer, 2020. "Green bonds and carbon emissions: exploring the case for a rating system at the firm level," BIS Quarterly Review, Bank for International Settlements, September.
    6. Robert F. Dittmar, 2008. "Do Sovereign Bonds Benefit Corporate Bonds in Emerging Markets?," The Review of Financial Studies, Society for Financial Studies, vol. 21(5), pages 1983-2014, September.
    7. Sirio Aramonte & Frank Packer, 2022. "Information governance in sustainable finance," BIS Papers, Bank for International Settlements, number 132.
    8. Mr. Luc Laeven, 2014. "The Development of Local Capital Markets: Rationale and Challenges," IMF Working Papers 2014/234, International Monetary Fund.
    9. Mark J. Flannery & Claire Yurong Hong & Baolian Wang, 2023. "The Effect of Government Reference Bonds on Corporate Borrowing Costs: Evidence from a Natural Experiment," Management Science, INFORMS, vol. 69(7), pages 4051-4077, July.
    10. Torsten Ehlers & Frank Packer, 2017. "Green bond finance and certification," BIS Quarterly Review, Bank for International Settlements, September.
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    12. Stijn Claessens & Daniela Klingebiel & Sergio L. Schmukler, 2007. "Government Bonds in Domestic and Foreign Currency: the Role of Institutional and Macroeconomic Factors," Review of International Economics, Wiley Blackwell, vol. 15(2), pages 370-413, May.
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    More about this item

    Keywords

    Green bonds; sustainable bonds; sovereign debt; taxonomies; green verification; bond market development; bond issuance; corporate bond bond market; issuance increase; sustainable bond markets; Climate finance; Corporate bonds; Sovereign bonds; Securities markets; Bond yields; Global; East Asia;
    All these keywords.

    JEL classification:

    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • Q01 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General - - - Sustainable Development
    • Q50 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - General

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