Are green bonds environmentally friendly and good performing assets?

The first objective of this paper is to study the existence of greenness in green bonds. For this objective, we propose a new model of price correlations between green bonds and energy commodities. The second objective is to examine the performance of green bonds over conventional bonds. We propose a new model of the expected return, the risk, and the performance ratio of green bond premiums defined by the log price differences between green and conventional bonds so as to address the second objective. Empirical studies using the data of green and conventional bond indices and crude oil prices show that the Bloomberg Barclays MSCI and the S&P green bond indices tend to have positive correlations with and increase in line with both WTI and Brent crude oil prices while the Solactive green bond index tends to have negative correlations with and decrease in line with both WTI and Brent crude oil prices. From the empirical evidence of the positive relationship between energy and environmental value, it is suggested that the greenness is incorporated in the Bloomberg Barclays MSCI and the S&P green bond. In contrast taking it into account that the conventional S&P bond index has negative correlations with WTI and Brent crude oil prices which are the same as the results of the Solactive green bond index, the Solactive green bond index may not fully represent the characteristics of green bonds in the sense of environmental value. We also demonstrate that the expected returns of green bond premiums are positive while decreasing and that the risks of green bond premiums are slightly decreasing but almost flat over time in the recent years, resulting in positive but decreasing information ratios. It implies that green bond investment performance is superior to conventional bond investment performance but the superiority is decaying over time.