Preferred habitat investors in the green bond market
Published: 03 April 2023
In recent years, the green bond market has seen significant growth as a means of financing environmentally-friendly projects. However, while much research has focused on pricing, little attention has been given to the investors who hold these bonds. This paper uses a preferred habitat framework to analyze the preferences of European investors for green bonds. By analyzing a confidential dataset of portfolio holdings from 2016-Q4 to 2022-Q4, the study finds that European investors, particularly mutual funds and pension funds, show a high demand for green bonds. In contrast, insurance corporations and households tend to avoid green bonds. The research also suggests that the demand for green bonds among mutual funds and pension funds is price inelastic, while banks and insurance corporations display an elastic demand. The findings highlight the presence of a preferred habitat for green bonds among European mutual funds and pension funds. These findings are robust for potential endogeneity concerns when we apply matching techniques, are stronger for domestic green bonds, and also apply to sustainability-linked bonds.
Keywords: green bonds; preferred habitat; institutional investors; securities holdings statistics; greenium; climate change; environmental impact; sustainability-linked bonds; portfolio holdings
JEL codes G11; G15; G23; Q54; Q56
Working paper no. 773
773 - Preferred habitat investors in the green bond market
Research highlights:
- Green bond markets have grown significantly in recent years, expanding to over EUR 2 trillion in market size by the end of 2022.
- While the market has expanded, relatively little is known about who holds green bonds.
- Using granular bond-level data from SHS-S we aim to fill this gap by showing that European investors invest 3.7% of their bond portfolio in green bonds, while green bonds represent only 1.5% of the total bonds outstanding value.
- We provide a theorical framework on preferred habitat in the green bond market to explain why in particular we find that European mutual funds and pension funds disproportionally invest in green bonds and that their holdings are very price insensitive, suggesting these investors have a green bond preference.
- By contrast and surprisingly, we find that European insurance corporations and households shun green bonds.
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